<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
SECURITIES ACT FILE NO. 333-43165
INVESTMENT COMPANY ACT FILE NO. 811-08575
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 1
(CHECK APPROPRIATE BOX OR BOXES)
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MUNIHOLDINGS NEW YORK FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ARTHUR ZEIKEL
MUNIHOLDINGS NEW YORK FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPIES TO:
PHILIP M. MANDEL, ESQ. FRANK P. BRUNO, ESQ.
FUND ASSET MANAGEMENT, L.P. LAURIN BLUMENTHAL KLEIMAN, ESQ.
P.O. BOX 9011 BROWN & WOOD LLP
PRINCETON, NEW JERSEY 08543-9011 ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF BEING OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par value)................ 7,705,000 shares $15.00 $115,575,000 $34,095
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</TABLE>
(1) Includes 1,005,000 shares subject to the Underwriter's over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
$295 was previously paid. $33,800 was transmitted in connection with this
filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
MUNIHOLDINGS NEW YORK FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
- --------------------- ---------------------
<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1.Outside Front Cover Page..................... Outside Front Cover Page
2.Inside Front and Outside Back Cover Pages.... Inside Front and Outside Back Cover Pages;
Underwriting
3.Fee Table and Synopsis....................... Prospectus Summary; Fee Table
4.Financial Highlights......................... Not Applicable
5.Plan of Distribution......................... Prospectus Summary; Net Asset Value;
Underwriting
6.Selling Shareholders......................... Not Applicable
7.Use of Proceeds.............................. Use of Proceeds; Investment Objective and
Policies
8.General Description of the Registrant........ Prospectus Summary; The Fund; Investment
Objective and Policies; Risks and Special
Considerations of Leverage; Investment
Restrictions; Dividends and Distributions;
Automatic Dividend Reinvestment Plan;
Mutual Fund Investment Option
9.Management................................... Directors and Officers; Investment
Advisory and Management Arrangements;
Custodian; Transfer Agent, Dividend
Disbursing Agent and Registrar
10.Capital Stock, Long-Term Debt, and Other
Securities................................. Description of Capital Stock
11.Defaults and Arrears on Senior Securities.... Not Applicable
12.Legal Proceedings............................ Not Applicable
13.Table of Contents of the Statement of
Additional Information..................... Not Applicable
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14.Cover Page................................... Not Applicable
15.Table of Contents............................ Not Applicable
16.General Information and History.............. Not Applicable
17.Investment Objective and Policies............ Prospectus Summary; Investment Objective
and Policies; Investment Restrictions
18.Management................................... Directors and Officers; Investment
Advisory and Management Arrangements
19.Control Persons and Principal Holders of Se- Investment Advisory and Management
curities................................... Arrangements
20.Investment Advisory and Other Services....... Investment Advisory and Management
Arrangements; Custodian; Underwriting;
Transfer Agent, Dividend Disbursing Agent
and Registrar; Legal Opinions; Experts
21.Brokerage Allocation and Other Practices..... Portfolio Transactions
22.Tax Status................................... Taxes; Automatic Dividend Reinvestment
Plan
23.Financial Statements......................... Report of Independent Auditors; Statement
of Assets, Liabilities and Capital
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 9, 1998
PROSPECTUS
6,700,000 SHARES
MUNIHOLDINGS NEW YORK FUND, INC.
COMMON STOCK
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MuniHoldings New York Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company that seeks to provide
shareholders with current income exempt from Federal income tax and New York
State and New York City personal income taxes. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax and New York
State and New York City personal income taxes. The Fund intends to maintain at
least 90% of its total assets in municipal obligations that are rated
investment grade or, if unrated, are considered by Fund Asset Management, L.P.
(the "Investment Adviser") to be of comparable quality. THE FUND MAY INVEST UP
TO 10% OF ITS TOTAL ASSETS IN MUNICIPAL OBLIGATIONS THAT ARE RATED BELOW
INVESTMENT GRADE OR, IF UNRATED, ARE CONSIDERED BY THE INVESTMENT ADVISER TO BE
OF COMPARABLE QUALITY. Investors are advised to read this Prospectus carefully
and retain it for future reference.
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for investors
expecting to sell their shares in a relatively short period after completion of
the public offering. See "Prospectus Summary--Risk Factors and Special
Considerations."
Within approximately three months after completion of the offering of Common
Stock described herein, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS ASSOCIATED WITH THE
LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL CONSIDERATIONS OF
LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK."
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE TO SALES LOAD PROCEEDS TO
PUBLIC (1)(2) FUND(3)
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<S> <C> <C> <C>
Per Share............. $15.00 None $15.00
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Total(4).............. $100,500,000 None $100,500,000
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</TABLE>
(1) The Investment Adviser or an affiliate will pay the Underwriter a
commission in the amount of % of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund
estimated at $ .
(4) The Fund has granted the Underwriter an option to purchase up to an
additional 1,005,000 shares to cover over-allotments. If all such shares
are purchased, the total Price to Public and Proceeds to Fund will be
$115,575,000. See "Underwriting."
--------------
The shares are offered by the Underwriter, subject to prior sale, when, as
and if issued by the Fund and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made in New York, New York on or about January
, 1998.
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MERRILL LYNCH & CO.
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The date of this Prospectus is January , 1998.
<PAGE>
(Continued from preceding page)
The Fund may invest all or a portion of its assets in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may
seek to hedge its portfolio through the use of options and futures
transactions. There can be no assurance that the investment objective of the
Fund will be realized. The Fund is designed primarily for long-term investors
and should not be considered a vehicle for trading purposes. The address of
the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
telephone number is (609) 282-2800.
Prior to this offering, there has been no public market for the Common Stock
of the Fund. Application will be made to list the Fund's shares of Common
Stock on the New York Stock Exchange. However, during an initial period which
is not expected to exceed two weeks from the date of this Prospectus, the
Fund's Common Stock will not be listed on any securities exchange. During such
period, the Underwriter does not intend to make a market in the Fund's Common
Stock. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that the preferred stock
will pay dividends that will be adjusted over either relatively short-term
periods (generally seven to 28 days) or medium-term periods (up to five years)
and that the dividend rate will be based upon prevailing interest rates for
debt obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. Because under normal market conditions,
obligations with longer maturities produce higher yields than short-term and
medium-term obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term rates paid
by the Fund and the longer-term rates received by the Fund will provide
holders of Common Stock with a potentially higher yield.
The Underwriter may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Fund's Common Stock. Such transactions may
include stabilizing, the purchase of the Fund's Common Stock to cover short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND MuniHoldings New York Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. See "The
Fund."
THE
OFFERING The Fund is offering 6,700,000 shares of Common Stock at an initial
offering price of $15.00 per share. The Common Stock is being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch" or the "Underwriter"). The Underwriter has been
granted an option, exercisable for 45 days from the date of this
Prospectus, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments. See "Underwriting."
INVESTMENT
OBJECTIVE AND
POLICIES
The investment objective of the Fund is to provide shareholders
with current income exempt from Federal income tax and New York
State and New York City personal income taxes. The Fund seeks to
achieve its investment objective by investing primarily in a
portfolio of long-term, investment grade municipal obligations the
interest on which, in the opinion of bond counsel to the issuer, is
exempt from Federal income tax and New York State and New York City
personal income taxes ("New York Municipal Bonds"). The Fund
intends to maintain at least 90% of its total assets in municipal
obligations that are rated investment grade or, if unrated, are
considered by the Investment Adviser to be of comparable quality.
The Fund may invest up to 10% of its total assets in municipal
obligations that are rated below investment grade or, if unrated,
are considered by the Investment Adviser to be of comparable
quality. Such lower quality municipal obligations (also commonly
referred to as "junk bonds") are frequently traded only in markets
where the number of potential purchasers and sellers, if any, is
very limited. Although the Fund may invest up to 10% of its total
assets in lower-rated municipal obligations, the asset coverage
requirements established by nationally recognized statistical
ratings organizations ("NRSROs") who may rate the Fund's preferred
stock currently limits such investments to less than 10% of total
assets. The Fund will seek to achieve its investment objective by
seeking to invest substantially all (a minimum of 80%) of its
assets in New York Municipal Bonds, except at times when, in the
judgment of the Investment Adviser, New York Municipal Bonds of
sufficient quality and quantity are unavailable for investment at
suitable prices by the Fund. At all times, except during interim
periods pending investment of the net proceeds of public offerings
of the Fund's securities and during temporary defensive periods,
the Fund will maintain at least 65% of its assets in New York
Municipal Bonds and at least 80% of its assets in New York
Municipal Bonds and other long-term municipal obligations exempt
from Federal income taxes, but not from New York State and New York
City personal income taxes ("Municipal Bonds"). The Fund ordinarily
does not intend to realize significant investment income not exempt
from Federal income tax and New York State and New York City
personal income taxes. See "Investment Objective and Policies."
LISTING Prior to this offering, there has been no public market for the
Common Stock of the Fund. Application will be made to list the
Fund's shares of Common Stock on the New York Stock
3
<PAGE>
Exchange. However, during an initial period which is not expected
to exceed two weeks from the date of this Prospectus, the Fund's
shares of Common Stock will not be listed on any securities
exchange. During such period, the Underwriter does not intend to
make a market in the Fund's shares of Common Stock. Consequently,
it is anticipated that an investment in the Fund will be illiquid
during such period. See "Underwriting."
LEVERAGE The Fund anticipates that it will be substantially invested in
longer-term municipal obligations within approximately three months
after completion of the offering of Common Stock described herein.
To leverage the Common Stock, the Fund intends to offer shares of
preferred stock within three months after completion of this
offering representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There can
be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. The
issuance of the preferred stock will result in the leveraging of
the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will
be adjusted over either relatively short-term periods (generally
seven to 28 days) or medium-term periods (up to five years) and
that the dividend rate will be based upon prevailing interest rates
for debt obligations of comparable maturity. The proceeds of the
preferred stock offering will be invested in longer-term
obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne
by the Fund and will reduce the net asset value of the Common
Stock. Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred stock,
it is anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting
from such allocation and such additional distribution (such amount,
an "Additional Distribution").
The use of leverage by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks.
Because, under normal market conditions, obligations with longer
maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread
inherent in the difference between the short-term and medium-term
rates (and any Additional Distribution) paid by the Fund and the
longer-term rates received by the Fund will provide holders of
Common Stock with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for holders of
Common Stock, including higher volatility of both the net asset
value and market value of the Common Stock. Since any decline in
the value of the Fund's investments will be borne entirely by
holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value than
if the Fund were not leveraged, which would likely be reflected in
a decline in the market price for shares of Common Stock.
Additionally, fluctuations in the dividend rates on, and the amount
of taxable income allocable to, the preferred stock will affect the
yield to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the preferred stock,
holders of the Common Stock will receive all net income of the Fund
remaining after payment of dividends (and any Additional
Distribution) on the preferred stock and will generally be entitled
to a pro rata
4
<PAGE>
share of net realized capital gains. Upon any liquidation of the
Fund, the holders of shares of preferred stock will be entitled to
receive liquidating distributions (expected to equal the original
purchase price per share of preferred stock plus any accumulated
and unpaid dividends thereon and any accumulated and unpaid
Additional Distribution) before any distribution is made to holders
of Common Stock. See "Description of Capital Stock--Preferred
Stock."
Holders of preferred stock, voting as a separate class, will be
entitled to elect two of the Fund's Directors, and holders of
common and preferred stock, voting together as a single class, will
be entitled to elect the remaining Directors. If, at any time,
dividends on the Fund's preferred stock were to be in arrears in an
amount equal to two full years of dividend payments, the holders of
all outstanding shares of preferred stock, voting as a separate
class, would be entitled to elect a majority of the Fund's
Directors. The holders of preferred stock will also vote separately
on certain other matters as required under the Fund's Articles of
Incorporation, the Investment Company Act of 1940, as amended (the
"1940 Act") and Maryland law, but otherwise will have equal voting
rights with holders of Common Stock (one vote per share) and will
vote together with holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting Rights."
There can be no assurance that the Fund will be able to realize a
higher net return on its investment portfolio than the then current
dividend rate (and any Additional Distribution) on the preferred
stock. Changes in certain factors could cause the relationship
between the short-term and medium-term dividend rates (and any
Additional Distribution) paid by the Fund on the preferred stock
and the long-term rates received by the Fund on its investment
portfolio to change so that such short-term and medium-term rates
(and any Additional Distribution) may substantially increase
relative to rates on the long-term obligations in which the Fund
may be invested. Under such conditions, the benefit of leverage to
holders of Common Stock will be reduced, and the Fund's leveraged
capital structure could result in a lower rate of return to holders
of Common Stock than if the Fund were not leveraged. The Fund will
have the authority to redeem the preferred stock for any reason and
may redeem all or part of the preferred stock if it anticipates
that the Fund's leveraged capital structure will result in a lower
rate of return to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged for any significant amount of
time.
Prior to the time it offers the preferred stock, the Fund intends
to apply for ratings on such stock from one or more NRSROs. The
Fund believes that obtaining a rating for the preferred stock will
enhance the marketability of the preferred stock and thereby reduce
the dividend rate on the preferred stock from that which the Fund
would be required to pay if the preferred stock were not rated.
INVESTMENT Fund Asset Management, L.P. is the Fund's investment adviser and is
ADVISER responsible for the management of the Fund's investment portfolio
and for providing administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of 0.55 of 1% of the Fund's average weekly net assets,
including any proceeds from the
5
<PAGE>
issuance of preferred stock. The Investment Adviser is an
affiliate of Merrill Lynch Asset Management, L.P. ("MLAM"), which
is owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co.").
The Investment Adviser or MLAM acts as the investment adviser for
over 140 registered management investment companies. The
Investment Adviser also offers portfolio management and portfolio
analysis services to individuals and institutions. As of November
30, 1997, the Investment Adviser and MLAM had a total of
approximately $273.9 billion in investment company and other
portfolio assets under management (approximately $34.1 billion of
which was invested in municipal securities), including accounts of
certain affiliates of the Investment Adviser. See "Investment
Advisory and Management Arrangements."
DIVIDENDS
AND
DISTRIBUTIONS
The Fund intends to pay dividends monthly and to distribute
substantially all of its net investment income to holders of
Common Stock. From and after issuance of the preferred stock,
monthly distributions to holders of Common Stock will consist of
substantially all net investment income remaining after the
payment of dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will commence paying
dividends to holders of Common Stock within approximately 90 days
from the date of this Prospectus. Net capital gains, if any, will
be distributed at least annually to holders of Common Stock and,
after issuance of the preferred stock, on a pro rata basis to
holders of Common Stock and preferred stock. When capital gains or
other taxable income is allocated to holders of preferred stock
under certain circumstances, it is anticipated that the terms of
the preferred stock will require the Fund to make an Additional
Distribution. The Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless asset
coverage (as defined in the 1940 Act) with respect to the Fund's
preferred stock is at least 200%. If the Fund issues preferred
stock representing 40% of its capital after the time of issuance,
its asset coverage with respect to the preferred stock will be
approximately 250%. If the Fund's ability to make distributions on
its Common Stock is limited, this could under certain
circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of Common
Stock. See "Taxes."
AUTOMATIC All dividend and capital gains distributions will be automatically
DIVIDEND reinvested in additional shares of Common Stock of the Fund unless
REINVESTMENT a shareholder elects to receive cash. Shareholders whose shares
PLAN are held in the name of a broker or nominee should contact such
broker or nominee to confirm that they may participate in the
Fund's dividend reinvestment plan. See "Automatic Dividend
Reinvestment Plan."
MUTUAL Purchasers of shares of Common Stock of the Fund through Merrill
FUND Lynch in this offering will have an investment option consisting
INVESTMENT of the right to reinvest the net proceeds from a sale of such
OPTION shares (the "Original Shares") in Class D initial sales charge
shares of certain Merrill Lynch-sponsored open-end mutual funds
("Eligible Class D Shares") at their net asset value, without the
imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares
must be made through Merrill Lynch, and the net proceeds
6
<PAGE>
therefrom must be immediately reinvested in Eligible Class D
Shares. Second, the Original Shares must have been either acquired
in this offering or be shares representing reinvested dividends
from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase
of $250 to be eligible for the investment option. Class D shares of
the mutual funds are subject to an account maintenance fee at an
annual rate of up to 0.25% of the average daily net asset value of
such mutual fund. See "Mutual Fund Investment Option."
7
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This risk may be greater for investors expecting to sell their shares in a
relatively short period after completion of the public offering. Accordingly,
the Common Stock of the Fund is designed primarily for long-term investors and
should not be considered a vehicle for trading purposes. The net asset value of
the Fund's shares of Common Stock will fluctuate with interest rate changes as
well as with price changes of the Fund's portfolio securities, and these
fluctuations are likely to be greater in the case of a fund having a leveraged
capital structure, as contemplated for the Fund. See "Risks and Special
Considerations of Leverage."
The Fund intends to invest a substantial portion of its assets in New York
Municipal Bonds and, therefore, it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of New York Municipal Bonds to this degree.
See "Investment Objective and Policies--Special Considerations Relating to New
York Municipal Bonds" and Appendix I, "Economic Conditions in New York."
The Fund has registered as a "non-diversified" investment company so that it
will be able to invest more than 5% of its assets in the obligations of any
single issuer, subject to the diversification requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more
susceptible than a more widely-diversified fund to any single economic,
political or regulatory occurrence.
The Fund intends to invest at least 90% of its total assets in municipal
obligations that are rated in the investment grade rating categories by
Standard & Poor's Ratings Services ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch IBCA, Inc. ("Fitch") or, if not rated, are considered to
be of comparable quality by the Investment Adviser. Obligations rated in the
lowest investment grade category may have certain speculative characteristics.
Obligations rated in the lowest investment-grade category may have certain
speculative characteristics. Additionally, the Fund may invest up to 10% of its
total assets in municipal obligations that are rated below investment grade or,
if not rated, are considered by the Investment Adviser to be of comparable
quality. These securities are regarded as predominantly speculative and
investments therein entail certain risks. See "Investment Objective and
Policies." The Fund may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Fund to the
alternative minimum tax. See "Taxes--General."
The Fund will be subject to certain restrictions on investments imposed by
guidelines of one or more NRSROs that may issue ratings for the preferred
stock. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments that may be characterized as
derivatives. These investments include various types of options transactions
and futures and options thereon. Such investments also may consist of non-
municipal tax-exempt securities and securities the potential investment return
on which is based on the change in particular measurements of value or interest
rates ("indexed securities"), including securities the potential investment
8
<PAGE>
return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse securities"). Certain of such investments may
be made solely for hedging purposes, not for speculation, and may in some cases
require limitations as to the type of permissible counterparty to the
transaction. Investments in indexed securities, including inverse securities,
subject the Fund to the risks associated with changes in the particular
indices, which may include reduced or eliminated interest payments and losses
of invested principal. Derivative instruments may have certain characteristics
that have a similar effect on the return to Common Stock investors as the
leverage transactions discussed under "Risks and Special Considerations of
Leverage;" however, certain derivative investments will not be taken into
account for purposes of calculating the percentage of leverage of the Fund's
portfolio. For a further discussion of the risks associated with derivative
investments, see "Investment Objective and Policies," "Investment Objective and
Policies--Other Investment Policies--Indexed and Inverse Floating Obligations,"
"--Call Rights" and "Investment Objective and Policies--Options and Futures
Transactions."
Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security that is the subject of the hedge and the inability to close futures
transactions under certain conditions. Because of the anticipated leveraged
nature of the Common Stock, hedging transactions will result in a larger impact
on the net asset value of the Common Stock than would be the case if the Common
Stock were not leveraged. Certain OTC options and assets used to cover OTC
options written by the Fund may be considered to be illiquid. The illiquidity
of such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
be otherwise realized. See "Investment Objective and Policies--Options and
Futures Transactions." The Fund intends to apply for ratings of the preferred
stock from one or more NRSROs. In order to obtain these ratings, the Fund may
be required to limit its use of hedging techniques in accordance with the
specified guidelines of such NRSRO.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. See "Description of Capital Stock--
Certain Provisions of the Articles of Incorporation."
9
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to shares of
Common Stock):
Management Fees(a)(b)................................................. 0.55%
Interest Payments on Borrowed Funds................................... None
Other Expenses(b)..................................................... 0.12%
----
Total Annual Expenses(b)............................................ 0.67%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
EXAMPLE ---- ----- ----- -----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) total annual expenses
of 0.67% (assuming no leverage) and 1.23% (assuming
leverage) and (2) a 5% annual return throughout the
periods:
Assuming No Leverage.................................. $ 7 $21 $37 $ 83
Assuming Leverage..................................... $13 $39 $68 $149
</TABLE>
- --------
(a) See "Investment Advisory and Management Arrangements"--page 26.
(b) In the event that the Fund utilizes leverage by issuing preferred stock in
an amount of approximately 40% of the Fund's capital, it is estimated
that, as a percentage of net assets attributable to Common Stock, the
Management Fees would be 0.92%, Other Expenses would be 0.31% and Total
Annual Expenses would be 1.23%. See "Risks and Special Considerations of
Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by the Securities and Exchange Commission regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
10
<PAGE>
THE FUND
MuniHoldings New York Fund, Inc. (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on December 4, 1997, and
has registered under the 1940 Act. The Fund's principal office is located at
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number
is (609) 282-2800.
The Fund has been organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as "mutual funds") in that closed-end investment companies do not
generally make a continuous offering of their shares or redeem their
securities at the option of the shareholder, whereas open-end companies issue
securities redeemable at net asset value at any time at the option of the
shareholder and typically engage in a continuous offering of their shares.
Accordingly, open-end investment companies are subject to continuous asset in-
flows and out-flows that can complicate portfolio management. Shares of
closed-end investment companies, however, frequently trade at a discount from
their net asset value. This risk may be greater for investors expecting to
sell their shares in a relatively short period after completion of the public
offering.
USE OF PROCEEDS
The net proceeds of this offering will be $ (or approximately $
assuming the Underwriter exercises the over-allotment option in full) after
payment of organizational and offering expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of the offering of Common Stock, depending on market
conditions and the availability of appropriate securities. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with current
income exempt from Federal income tax and New York State and New York City
personal income taxes. The Fund seeks to achieve its investment objective by
investing primarily in a portfolio of long-term, investment grade municipal
obligations issued by or on behalf of the State of New York, its political
subdivisions, agencies and instrumentalities and by other qualifying issuers
which, in the opinion of bond counsel to the issuer, is exempt from Federal
income tax and New York State and New York City personal income taxes ("New
York Municipal Bonds"). The Fund will seek to achieve its investment objective
by seeking to invest substantially all (a minimum of 80%) of its assets in New
York Municipal Bonds, except at times when, in the judgment of the Investment
Adviser, New York Municipal Bonds of sufficient quality and quantity are
unavailable for investment by the Fund. At all times, except during temporary
defensive periods, the Fund will maintain at least 90% of its total assets in
New York Municipal Bonds and Municipal Bonds that are rated investment grade
by S&P, Moody's or Fitch, or, if unrated, are considered to be of comparable
quality by the Investment Adviser. Additionally, the Fund may invest up to 10%
of its total assets in New York Municipal Bonds and Municipal Bonds that are
rated below investment grade by S&P, Moody's or Fitch, or, if unrated, are
considered to be of comparable quality by the Investment Adviser. Such lower
quality New York Municipal Bonds and Municipal Bonds are frequently traded
only in markets where the number of potential purchasers and sellers, if any,
is very limited. In addition, the Fund also will maintain at least 65% of its
assets in New York Municipal Bonds. The investment objective of the Fund is a
11
<PAGE>
fundamental policy that may not be changed without a vote of a majority of the
Fund's outstanding voting securities, as defined below under "Investment
Restrictions." There can be no assurance that the investment objective of the
Fund will be realized. At times the Fund may seek to hedge its portfolio
through the use of futures transactions and options to reduce volatility in
the net asset value of its shares of Common Stock.
The Fund ordinarily does not intend to realize significant investment income
not exempt from Federal income tax and New York State and New York City
personal income taxes. To the extent that suitable New York Municipal Bonds
are not available for investment by the Fund, as determined by the Investment
Adviser, the Fund may purchase long-term obligations issued by or on behalf of
other states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities paying interest which,
in the opinion of bond counsel to the issuer, is exempt from Federal income
tax but not New York State and New York City personal income taxes. At all
times, except during interim periods pending investment of the net proceeds of
public offerings of the Fund's securities and during temporary defensive
periods, the Fund will have at least 80% of its assets invested in New York
Municipal Bonds and Municipal Bonds. The Fund may invest all or a portion of
its assets in certain tax-exempt securities classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to an alternative minimum tax.
The Fund also may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions that are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may also include securities issued by
other investment companies that invest in New York Municipal Bonds and
Municipal Bonds, to the extent such investments are permitted by the 1940 Act.
Other Non-Municipal Tax-Exempt Securities could include trust certificates or
other instruments evidencing interests in one or more long-term New York
Municipal Bonds or Municipal Bonds. Certain Non-Municipal Tax-Exempt
Securities may be characterized as derivative instruments. Non-Municipal Tax-
Exempt Securities will be considered "New York Municipal Bonds" or "Municipal
Bonds" for purposes of the Fund's investment objective and policies.
Investment in shares of Common Stock of the Fund offers several potential
benefits. The Fund offers investors the opportunity to receive income exempt
from Federal income tax and New York State and New York City personal income
taxes by investing in a professionally managed portfolio comprised primarily
of investment grade New York Municipal Bonds. Investment in the Fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of New York Municipal Bonds. Additionally, the Investment
Adviser will seek to enhance the yield on the Common Stock by leveraging the
Fund's capital structure through the issuance of preferred stock. The benefits
are at least partially offset by the expenses involved in operating an
investment company. Such expenses primarily consist of the advisory fee and
operational costs. Additionally, the use of leverage involves certain expenses
and special risk considerations. See "Risks and Special Considerations of
Leverage."
The investment grade New York Municipal Bonds and Municipal Bonds in which
the Fund will primarily invest are those New York Municipal Bonds and
Municipal Bonds rated at the date of purchase in the four highest rating
categories of S&P, Moody's or Fitch or, if unrated, are considered to be of
comparable quality by the Investment Adviser. In the case of long-term debt,
the investment grade rating categories are AAA through BBB for S&P, Aaa
through Baa for Moody's and AAA through BBB for Fitch. In the case of short-
term notes, the investment grade rating categories are SP-1+ through SP-3 for
S&P, MIG-1 through MIG-4 for Moody's
12
<PAGE>
and F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper,
the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1
through Prime-3 for Moody's and F-1+ through F-3 for Fitch. Obligations ranked
in the fourth highest rating category (BBB, SP-3 and A-3 for S&P; Baa, MIG-4
and Prime-3 for Moody's; and BBB and F-3 for Fitch), while considered
"investment grade," may have certain speculative characteristics. There may be
sub-categories or gradations indicating relative standing within the rating
categories set forth above. See Appendix II to this Prospectus for a
description of S&P's, Moody's and Fitch's ratings of New York Municipal Bonds
and Municipal Bonds. In assessing the quality of New York Municipal Bonds and
Municipal Bonds with respect to the foregoing requirements, the Investment
Adviser will take into account the nature of any letters of credit or similar
credit enhancements to which particular Municipal Bonds are entitled and the
creditworthiness of the financial institution that provided such insurance.
As noted above, the Fund may invest up to 10% of its assets in New York
Municipal Bonds and Municipal Bonds that are rated below investment grade or,
if unrated, are considered to be of comparable quality by the Investment
Adviser. These high yield bonds are commonly referred to as "junk bonds" and
are regarded as predominantly speculative as to the issuer's ability to make
payments of principal and interest. Consequently, although such bonds can be
expected to provide higher yields and be less subject to interest rate
fluctuations, they may be subject to greater overall market risk and risk of
loss of principal than lower yielding, higher rated fixed-income securities.
Such securities are particularly vulnerable to adverse changes in the issuer's
industry and in general economic conditions. Issuers of high yield bonds may
be highly leveraged and may not have available to them more traditional
methods of financing. The risk of loss due to default by the issuer is
significantly greater for the holders of these bonds because such securities
may be unsecured and may be subordinated to other creditors of the issuer. In
addition, while the high yield bonds in which the Fund may invest normally
will not include securities that at the time of investment are in default or
the issuers of which are in bankruptcy, there can be no assurance that such
events will not occur after the Fund purchases a particular security, in which
case the Fund may experience losses and incur costs. Although the Fund may
invest up to 10% of its total assets in lower-rated New York Municipal Bonds
and Municipal Bonds, the asset coverage requirements established by NRSROs who
may rate the Fund's preferred stock currently limits such investments to less
than 10% of total assets.
High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to the Fund and dividends to shareholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Certain New York Municipal Bonds and Municipal Bonds may be entitled to the
benefits of letters of credit or similar credit enhancements issued by
financial institutions. In such instances, the Board of Directors and the
Investment Adviser will take into account in assessing the quality of such
bonds not only the creditworthiness of the issuer of such bonds but also the
creditworthiness of the financial institution providing the credit
enhancement.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a
13
<PAGE>
financial institution, typically a commercial bank. The VRDOs in which the
Fund will invest are tax-exempt obligations, in the opinion of counsel to the
issuer, that contain a floating or variable interest rate adjustment formula
and an unconditional right of demand on the part of the holder thereof to
receive payment of the unpaid principal balance plus accrued interest on a
short notice period not to exceed seven days. Participating VRDOs provide the
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance
plus accrued interest on the Participating VRDOs from the financial
institution on a specified number of days' notice, not to exceed seven days.
There is, however, the possibility that because of default or insolvency, the
demand feature of VRDOs or Participating VRDOs may not be honored. The Fund
has been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax-exempt
obligations.
The average maturity of the Fund's portfolio securities will vary based upon
the Investment Adviser's assessment of economic and market conditions. The net
asset value of the shares of common stock of a closed-end investment company,
such as the Fund, which invests primarily in fixed-income securities, changes
as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
can be expected to decline. Prices of longer-term securities generally
fluctuate more in response to interest rate changes than do short-term or
medium-term securities. These changes in net asset value are likely to be
greater in the case of a fund having a leveraged capital structure, as
proposed for the Fund. See "Risks and Special Considerations of Leverage."
The Fund intends to invest primarily in long-term New York Municipal Bonds
and Municipal Bonds with a maturity of more than ten years. Also, the Fund may
invest in intermediate-term New York Municipal Bonds and Municipal Bonds with
a maturity of between three years and ten years. The Fund may invest in short-
term, tax-exempt securities, short-term U.S. Government securities, repurchase
agreements or cash. Such short-term securities or cash will not exceed 20% of
its total assets except during interim periods pending investment of the net
proceeds of public offerings of the Fund's securities or in anticipation of
the repurchase or redemption of the Fund's securities and temporary periods
when, in the opinion of the Investment Adviser, prevailing market or economic
conditions warrant. The Fund does not ordinarily intend to realize significant
interest income not exempt from Federal income tax and New York State and New
York City personal income tax.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for special tax
treatment afforded regulated investment companies under the Code. See "Taxes."
To qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities (other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% requirement with respect to 75% of its total assets. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's yield may fluctuate to a greater extent than
that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
DESCRIPTION OF NEW YORK MUNICIPAL BONDS AND MUNICIPAL BONDS
New York Municipal Bonds and Municipal Bonds include debt obligations issued
to obtain funds for various public purposes, including construction of a wide
range of public facilities, refunding of outstanding
14
<PAGE>
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
For purposes of this Prospectus, such obligations are Municipal Bonds if the
interest paid thereon is exempt from Federal income tax and as New York
Municipal Bonds if the interest thereon is exempt from Federal income tax and
exempt from New York State and New York City personal income tax, even though
such bonds may be industrial development bonds ("IDBs") or "private activity
bonds" as discussed below. Also, for purposes of this Prospectus, Non-
Municipal Tax-Exempt securities as discussed above will be considered New York
Municipal Bonds or Municipal Bonds.
The two principal classifications of New York Municipal Bonds and Municipal
Bonds are "general obligation" bonds and "revenue" bonds, which latter
category includes IDBs and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the repayment of principal and the payment
of interest. Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. IDBs are in most
cases revenue bonds and do not generally constitute the pledge of the credit
or taxing power of the issuer of such bonds. The repayment of principal and
the payment of interest on such industrial development bonds depends solely on
the ability of the user of the facility financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. New York Municipal Bonds and Municipal
Bonds may also include "moral obligation" bonds, which are normally issued by
special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality in
question.
The Fund may purchase New York Municipal Bonds and Municipal Bonds
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities). Interest received on certain tax-exempt securities
that are classified as "private activity bonds" may subject certain investors
in the Fund to an alternative minimum tax. There is no limitation on the
percentage of the Fund's assets that may be invested in New York Municipal
Bonds and Municipal Bonds that may subject certain investors to an alternative
minimum tax. See "Taxes--General." Also included within the general category
of New York Municipal Bonds and Municipal Bonds are participation certificates
issued by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. The certificates represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively referred to as "lease obligations")
relating to such equipment, land or facilities. Although lease obligations do
not constitute general obligations of the issuer for which the issuer's
unlimited taxing power is pledged, a lease obligation frequently is backed by
the issuer's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain "non-
appropriation" clauses, which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the lease property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of New York Municipal Bonds and Municipal Bonds for
investment by the Fund.
15
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL BONDS
The Fund ordinarily will invest at least 80% of its assets in New York
Municipal Bonds, and, therefore, it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of New York Municipal Bonds to this
degree. As of October 31, 1997, Moody's, S&P and Fitch rated New York City's
general obligation bonds "Baa1", BBB+ and A-, respectively. Moody's, S&P and
Fitch currently rate New York State's outstanding general obligation bonds
"A2," A- and A+, respectively. Because the Fund's portfolio will comprise
investment grade securities, the Fund is expected to be insulated from the
market and credit risks that may exist in connection with investments in non-
investment grade New York Municipal Bonds. There is no assurance that a
particular rating will continue for any given period of time or that any such
rating will not be revised downward or withdrawn entirely if, in the judgment
of the agency originally establishing the rating, circumstances so warrant.
The Investment Adviser does not believe that the current economic conditions
in New York will have a significant adverse effect on the Fund's ability to
invest in high quality New York Municipal Bonds. For a discussion of economic
and other conditions in the State of New York, see Appendix I, "Economic
Conditions in New York."
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 5% of
the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to 33
1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known,
as with the issuance of preferred stock, as "leveraging") create an
opportunity for greater total return since the Fund will not be required to
sell portfolio securities to repurchase or redeem shares but, at the same
time, increase exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell New York Municipal Bonds and Municipal Bonds on a delayed
delivery basis or on a when-issued basis at fixed purchase or sale terms.
These transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future. The purchase will be
recorded on the date the Fund enters into the commitment, and the value of the
obligation will thereafter be reflected in the calculation of the Fund's net
asset value. The value of the obligation on the delivery day may be more or
less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or liquid
securities having a market value at all times at least equal to the amount of
the commitment.
Indexed and Inverse Floating Obligations. The Fund may invest in New York
Municipal Bonds and Municipal Bonds the return on which is based on a
particular index of value or interest rates. For example, the Fund may invest
in New York Municipal Bonds and Municipal Bonds that pay interest based on an
index of Municipal Bond interest rates. The principal amount payable upon
maturity of certain New York Municipal Bonds and Municipal Bonds also may be
based on the value of an index. To the extent the Fund invests in these types
of Municipal Bonds, the Fund's return on such New York Municipal Bonds and
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Also, the Fund may invest in so-called "inverse
16
<PAGE>
floating obligations" or "residual interest bonds" on which the interest rates
typically vary inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by reference to a
short-term tax-exempt interest rate index). The Fund may purchase in the
secondary market synthetically-created inverse floating rate bonds evidenced
by custodial or trust receipts. Generally, interest rates on inverse floating
rate bonds will decrease when short-term rates increase, and will increase
when short-term rates decrease. Such securities have the effect of providing a
degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate
that is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit
the volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or limitations on the extent to which
the interest rate may vary. The Investment Adviser believes that indexed and
inverse floating obligations represent a flexible portfolio management
instrument for the Fund that allows the Investment Adviser to vary the degree
of investment leverage relatively efficiently under different market
conditions.
Call Rights. The Fund may purchase a New York Municipal Bond or Municipal
Bond issuer's right to call all or a portion of such New York Municipal Bond
or Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder
of a Call Right may exercise such right to require a mandatory tender for the
purchase of related New York Municipal Bonds or Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity
of the related New York Municipal Bond or Municipal Bond will expire without
value. The economic effect of holding both the Call Right and the related New
York Municipal Bonds or Municipal Bond is identical to holding a New York
Municipal Bond or Municipal Bond as a non-callable security.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security at
a mutually agreed-upon time and price, thereby determining the yield during
the term of the agreement. The Fund may not invest in repurchase agreements
maturing in more than seven days if such investments, together with all other
illiquid investments, would exceed 15% of the Fund's net assets. In the event
of default by the seller under a repurchase agreement, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the underlying securities.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts ("financial futures contracts") and options
thereon. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of the Common Stock, the net asset value of
the Common Stock will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. In addition, because of the
anticipated leveraged nature of the Common Stock, hedging transactions will
result in a larger impact on the net asset value of the Common Stock
17
<PAGE>
than would be the case if the Common Stock were not leveraged. Furthermore,
the Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in interest rates
occur.
Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more NRSROs, the
Fund may be required to limit its use of hedging techniques in accordance with
the specified guidelines of such organizations.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith. The investment policies with respect to the
hedging transactions of the Fund are not fundamental policies and may be
modified by the Board of Directors of the Fund without the approval of the
Fund's shareholders.
Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to New York Municipal Bonds and Municipal Bonds it owns,
thereby giving the holder of the option the right to buy the underlying
security covered by the option from the Fund at the stated exercise price
until the option expires. The Fund writes only covered call options, which
means that so long as the Fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option. The Fund may not
write covered call options on underlying securities in an amount exceeding 15%
of the market value of its total assets.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits
its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as a writer continues. Covered call options serve as a
partial hedge against a decline in the price of the underlying security. The
Fund may engage in closing transactions in order to terminate outstanding
options that it has written.
Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires. The amount of any appreciation in the value of the underlying
security will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction; profit or loss from the sale
will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities that it intends to purchase. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Financial Futures Contracts and Options. The Fund is authorized to purchase
and sell certain financial futures contracts and options thereon solely for
the purpose of hedging its investments in New York Municipal Bonds and
Municipal Bonds against declines in value and to hedge against increases in
the cost of securities it
18
<PAGE>
intends to purchase. A financial futures contract obligates the seller of a
contract to deliver and the purchaser of a contract to take delivery of the
type of financial instrument covered by the contract or, in the case of index-
based futures contracts, to make and accept a cash settlement, at a specific
future time for a specified price. A sale of financial futures contracts may
provide a hedge against a decline in the value of portfolio securities because
such depreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts. A purchase of
financial futures contracts may provide a hedge against an increase in the
cost of securities intended to be purchased because such appreciation may be
offset, in whole or in part, by an increase in the value of the position in
the futures contracts.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker equal to approximately
5% of the contract amount must be deposited with the broker. This amount is
known as initial margin. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the
financial futures contract more or less valuable.
The Fund may purchase and sell financial futures contracts based on The Bond
Buyer Municipal Bond Index, a price-weighted measure of the market value of 40
large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging New York Municipal
Bonds and Municipal Bonds that the Fund holds or anticipates purchasing
against adverse changes in interest rates. The Fund also may purchase and sell
financial futures contracts on U.S. Government securities and purchase and
sell put and call options on such financial futures contracts for such hedging
purposes. With respect to U.S. Government securities, currently there are
financial futures contracts based on long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts, such as financial
futures contracts on other municipal bond indices that may become available,
if the Investment Adviser should determine that there is normally sufficient
correlation between the prices of such financial futures contracts and the New
York Municipal Bonds and Municipal Bonds in which the Fund invests to make
such hedging appropriate.
Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below
for information as to restrictions on the use of OTC options.
Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with banks or dealers that have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Certain OTC options and assets used to cover OTC options written
by the Fund may be considered to be illiquid. The illiquidity of such options
or assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the
19
<PAGE>
security that is the subject of the hedge. If the price of the financial
futures contract moves more or less than the price of the security that is the
subject of the hedge, the Fund will experience a gain or loss that will not be
completely offset by movements in the price of such security. There is a risk
of imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation
may be affected by additions to or deletions from the index that serves as a
basis for a financial futures contract. Finally, in the case of financial
futures contracts on U.S. Government securities and options on such financial
futures contracts, the anticipated correlation of price movements between the
U.S. Government securities underlying the futures or options and New York
Municipal Bonds and Municipal Bonds may be adversely affected by economic,
political, legislative or other developments that have a disparate impact on
the respective markets for such securities.
Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations, provided that
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell financial futures contracts and options thereon (i) for bona fide
hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits
and unrealized losses on any such transactions. Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., commercial paper and daily tender adjustable notes) or
liquid securities in a segregated account with the Fund's custodian so that
the amount so segregated plus the amount of initial and variation margin held
in the account of its broker equals the market value of the financial futures
contract, thereby ensuring that the use of such financial futures contract is
unleveraged.
Although certain risks are involved in options and futures transactions, the
Investment Adviser believes that, because the Fund will engage in options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The volume of trading in the exchange markets with respect to New York
Municipal Bond and Municipal Bond options may be limited, and it is impossible
to predict the amount of trading interest that may exist in such options. In
addition, there can be no assurance that viable exchange markets will continue
to be available.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by the Fund of margin deposits or collateral in the
event of bankruptcy of a broker with which the Fund has an open position in an
option or financial futures contract.
20
<PAGE>
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges that limit the amount of fluctuation in a financial
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days.
If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so.
The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize
a loss on the hedging transaction that is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions
from time to time and may not necessarily be engaged in hedging transactions
when movements in interest rates occur.
RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE
EFFECTS OF LEVERAGE
Within approximately three months after the completion of the offering of
shares of Common Stock, the Fund intends to offer shares of preferred stock
representing approximately 40% of the Fund's capital immediately after the
issuance of such preferred stock. There can be no assurance, however, that
preferred stock representing such percentage of the Fund's capital will
actually be issued. The issuance of the preferred stock will result in the
leveraging of the Common Stock. Although the terms of the preferred stock
offering will be determined by the Fund's Board of Directors, it is
anticipated that the preferred stock will pay dividends that will be adjusted
over either relatively short-term periods (generally seven to 28 days) or
medium-term periods (up to five years) and that the dividend rate will be
based upon prevailing interest rates for debt obligations of comparable
maturity. The proceeds of the preferred stock offering will be invested in
longer-term obligations in accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock will be borne by the Fund
and will reduce the net asset value of the Common Stock. Additionally, under
certain circumstances, when the Fund is required to allocate taxable income to
holders of preferred stock, it is anticipated that the terms of the preferred
stock will require the Fund to make an additional distribution to such holders
in an amount approximately equal to the tax liability resulting from such
allocation and such additional distribution (such amount, an "Additional
Distribution"). Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates (and any Additional
Distribution) paid by the Fund as dividends on the preferred stock and the
longer-term rates received by the Fund will provide holders of Common Stock
with a potentially higher yield.
Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in
higher volatility of the net asset value of the Common Stock and
21
<PAGE>
potentially more volatility in the market value of the Common Stock. In
addition, fluctuations in the short-term and medium-term dividend rates on,
and the amount of taxable income allocable to, the preferred stock will affect
the yield to holders of Common Stock. So long as the Fund, taking into account
the costs associated with the preferred stock and the Fund's operating
expenses, is able to realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional Distribution) of the
preferred stock, the effect of leverage will be to cause holders of Common
Stock to realize a higher current rate of return than if the Fund were not
leveraged. Similarly, since a pro rata portion of the Fund's net realized
capital gains on its investment assets are generally payable to holders of
Common Stock if net capital gains are realized by the Fund, the effect of
leverage will be to increase the amount of such gains distributed to holders
of Common Stock. However, short-term, medium-term and long-term interest rates
change from time to time as does their relationship to each other (i.e., the
slope of the yield curve) depending upon such factors as supply and demand
forces, monetary and tax policies and investor expectations. Changes in any or
all of such factors could cause the relationship between short-term, medium-
term and long-term rates to change (i.e., to flatten or to invert the slope of
the yield curve) so that short-term and medium-term rates may substantially
increase relative to the long-term obligations in which the Fund may be
invested. To the extent that the current dividend rate (and any Additional
Distribution) on the preferred stock approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of Common Stock will
be reduced, and if the current dividend rate (and any Additional Distribution)
on the preferred stock were to exceed the net return on the Fund's portfolio,
the Fund's leveraged capital structure would result in a lower rate of return
to holders of Common Stock than if the Fund were not leveraged. Similarly,
since both the cost associated with the issuance of preferred stock and any
decline in the value of the Fund's investments (including investments
purchased with the proceeds from any preferred stock offering) will be borne
entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged.
In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Code. See "Taxes." The Fund intends, however, to
take all measures necessary to continue to make Common Stock dividend
payments. If the Fund's current investment income were not sufficient to meet
dividend requirements on either the Common Stock or the preferred stock, it
could be necessary for the Fund to liquidate certain of its investments. In
addition, the Fund will have the authority to redeem the preferred stock for
any reason and may redeem all or part of the preferred stock if (i) it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return for any significant amount of time to holders of the Common
Stock than that obtainable if the Common Stock were unleveraged, (ii) the
asset coverage for the preferred stock declines below 200% either as a result
of a decline in the value of the Fund's portfolio investments or as a result
of the repurchase of Common Stock in tender offers, or (iii) in order to
maintain the asset coverage guidelines established by the NRSROs that have
rated the preferred stock. Redemption of the preferred stock or insufficient
investment income to make dividend payments, may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its
investments at a time when it may be disadvantageous, in the absence of such
extraordinary circumstances, to do so.
Assuming the utilization of leverage by the issuance of preferred stock that
pays dividends at a rate that generally will be adjusted every 28 days in an
amount representing approximately 40% of the Fund's capital at an annual
dividend rate of 3.50% payable on such preferred stock based on market rates
as of the date of this Prospectus, the annual return that the Fund's portfolio
must experience (net of expenses) in order to cover such dividend payments
would be 1.00%.
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<PAGE>
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
preferred stock representing approximately 40% of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when the portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses)................................... (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return.................... (15)% (8)% (1)% 6% 13%
</TABLE>
Leveraging of the Common Stock cannot be fully achieved until preferred
stock is issued and the proceeds of the offering of preferred stock have been
invested in long-term New York Municipal Bonds and Municipal Bonds.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation of
such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of
leverage on holders of Common Stock. The Fund also may attempt to reduce the
degree to which it is leveraged by redeeming preferred stock pursuant to the
provisions of the Fund's Articles Supplementary establishing the rights and
preferences of the preferred stock or otherwise purchasing shares of preferred
stock. Purchases and redemptions of preferred stock, whether on the open
market or in negotiated transactions, are subject to limitations under the
1940 Act. In determining whether or not it is in the best interest of the Fund
and its stockholders to redeem outstanding preferred stock, the Board of
Directors will take into account a variety of factors including market
conditions, the ratio of preferred stock to Common Stock and the expenses
associated with such redemption. If market conditions subsequently change, the
Fund may sell previously unissued shares of preferred stock or shares of
preferred stock that the Fund previously issued but later repurchased or
redeemed.
The Fund intends to apply for ratings of the preferred stock from one or
more NRSROs. In order to obtain these ratings, the Fund may be required to
maintain portfolio holdings meeting specified guidelines of such
organizations. These guidelines may impose asset coverage requirements that
are more stringent than those imposed by the 1940 Act. It is not anticipated
that these guidelines will impede the Investment Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Ratings on preferred stock issued by the Fund should not be confused
with ratings on obligations held by the Fund.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price of the
outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated and unpaid Additional Distribution). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or distribution) is at least 200% of the liquidation value of
the outstanding preferred stock. Under the Fund's proposed capital structure,
assuming the sale of shares of preferred
23
<PAGE>
stock representing approximately 40% of the Fund's capital, the net asset
value of the Fund's portfolio is expected to be approximately 250% of the
liquidation value of the Fund's preferred stock. To the extent possible, the
Fund intends to purchase or redeem shares of preferred stock from time to time
to maintain coverage of preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, prior
to issuance of the preferred stock, may not be changed without the approval of
the holders of a majority of the Fund's outstanding shares of Common Stock
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50%
of the outstanding shares). Subsequent to the issuance of the preferred stock,
the following investment restrictions may not be changed without the approval
of a majority of the outstanding shares of Common Stock and of the outstanding
shares of preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of preferred stock, voting separately as a
class. The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by entities that invest in real estate or
interest therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
3. Issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act.
4. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
5. Make loans to other persons, except that the Fund may purchase New
York Municipal Bonds, Municipal Bonds and other debt securities and enter
into repurchase agreements in accordance with its investment objective,
policies and limitations.
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors without shareholder approval, provide that the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.
24
<PAGE>
b. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in investment restriction
(3) above or except as may be necessary in connection with transactions in
financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).
d. Make short sales of securities or maintain a short position or invest
in put, call, straddle or spread options, except that the Fund may write,
purchase and sell options and futures on New York Municipal Bonds,
Municipal Bonds, U.S. Government obligations and related indices or
otherwise in connection with bona fide hedging activities and may purchase
and sell Call Rights to require mandatory tender for the purchase of
related New York Municipal Bonds and Municipal Bonds.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.
The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. An exemptive order has been obtained that permits
the Fund to effect principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities subject to conditions set forth in such
order. The Fund may consider in the future requesting an order permitting
other principal transactions with Merrill Lynch, but there can be no assurance
that such application will be made and, if made, that such order would be
granted.
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
managers of the Fund, including their ages and their principal occupations
during the last five years is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.
Arthur Zeikel (65)--President and Director (1)(2)--Chairman of the
Investment Adviser (which term, as used herein, includes its corporate
predecessors) and MLAM (which term, as used herein, includes its corporate
predecessors) since 1997; President of the Investment Adviser from 1977 to
1997; President of MLAM from 1977 to 1997; Director of Princeton Services,
Inc. ("Princeton Services"); President of Princeton Services from 1993 to
1997; Executive Vice President of ML & Co. since 1990.
James H. Bodurtha (53)--Director (2)--36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
25
<PAGE>
Herbert I. London (58)--Director(2)--113-115 University Place, New York, New
York 10003. John M. Olin Professor of Humanities, New York University since
1993 and Professor thereof since 1980; President, Hudson Institute since 1997
and Trustee since 1980; Dean, Gallatin Division of New York University from
1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from
1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center
for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP in 1996.
Robert R. Martin (70)--Director(2)--513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof
in 1979; Director, Securities Industry Association from 1981 to 1982 and
Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries, Inc. in 1994; Trustee, Northland College since 1992.
Joseph L. May (68)--Director(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold (45)--Director(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of MLFD
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Vincent R. Giordano (53)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993.
Donald C. Burke (37)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Kenneth A. Jacob (46)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1984 to 1997.
Roberto Roffo (31)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1996 and a Portfolio Manager since 1992; employee of
State Street Bank and Trust Company from 1989 to 1992.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of MLFD since
1981; Treasurer since 1984.
Philip M. Mandel (50)--Secretary (1)(2)--First Vice President of MLAM since
1997; Assistant General Counsel of Merrill Lynch from 1989 to 1997.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, MLAM, acts as investment adviser or manager.
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<PAGE>
In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's Directors,
and the remaining Directors will be elected by all holders of capital stock,
voting as a single class. See "Description of Capital Stock."
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser (each
a "non-affiliated Director") a fee of $2,500 per year plus $250 per meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit
Committee, which consists of all the non-affiliated Directors, an annual fee
of $500 per year plus $125 per Committee meeting attended. The Fund reimburses
each non-affiliated Director for his out-of-pocket expenses relating to
attendance at Board and Committee meetings.
The following table sets forth compensation to be paid by the Fund to the
non-affiliated Directors projected through the end of the Fund's first full
fiscal year and for the calendar year ended December 31, 1996 the aggregate
compensation paid by all investment companies advised by the Investment
Adviser and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-
affiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM
COMPENSATION ACCRUED AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSE TO DIRECTORS
- ---------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
James H. Bodurtha(1)........ $4,500 None $148,500
Herbert I. London(1)........ $4,500 None $148,500
Robert R. Martin(1)......... $4,500 None $148,500
Joseph L. May(1)............ $4,500 None $148,500
Andre F. Perold(1).......... $4,500 None $148,500
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
FAM/MLAM Advised Funds as follows: Mr. Bodurtha (22 registered investment
companies consisting of 46 portfolios); Mr. London (22 registered
investment companies consisting of 46 portfolios); Mr. Martin (22
registered investment companies consisting of 46 portfolios); Mr. May (22
registered investment companies consisting of 46 portfolios); and Mr.
Perold (22 registered investment companies consisting of 46 portfolios).
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The
Investment Adviser or MLAM acts as the investment adviser for over 140 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of November 30, 1997, the Investment Adviser and MLAM had a total of
approximately $273.9 billion in investment company and other portfolio assets
under management (approximately $34.1 billion of which were invested in
municipal securities), including accounts of certain affiliates of the
Investment Adviser. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to supervision of the
Board of Directors of the Fund, the Investment Adviser is responsible
27
<PAGE>
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors. The Fund's
portfolio manager will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund. Roberto Roffo is the
portfolio manager for the Fund and is primarily responsible for the Fund's
day-to-day management.
For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.55
of 1% of the Fund's average weekly net assets (i.e., the average weekly value
of the total assets of the Fund, including proceeds from the issuance of
shares of preferred stock, minus the sum of accrued liabilities of the Fund
and accumulated dividends on the shares of preferred stock). For purposes of
this calculation, average weekly net assets are determined at the end of each
month on the basis of the average net assets of the Fund for each week during
the month. The assets for each weekly period are determined by averaging the
net assets at the last business day of a week with the net assets at the last
business day of the prior week.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
printing proxies, listing fees, stock certificates and shareholder reports,
charges of the custodian and the transfer and dividend disbursing agent and
registrar, fees and expenses with respect to the issuance of preferred stock,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
Directors, accounting and pricing costs, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, mailing and
other expenses properly payable by the Fund. Accounting services are provided
to the Fund by the Investment Adviser, and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
28
<PAGE>
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Investment Adviser
and, as described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S.
Government securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" that prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provided supplemental
investment research to the Investment Adviser, including Merrill Lynch, may
receive orders for transactions by the Fund. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses
of the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information.
The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the 1940 Act, except as permitted by exemptive order, persons affiliated with
the Fund are prohibited from dealing with the Fund as principal in the
purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions except that,
pursuant to an exemptive order obtained by the Investment Adviser, the Fund
may engage in principal transactions with Merrill Lynch in high quality,
short-term, tax-exempt securities. See "Investment Restrictions." An
affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Fund may also purchase tax-exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
29
<PAGE>
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons
appears advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances after
the Fund's portfolio is invested in accordance with its investment objective,
will be less than 100%. The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of
substantially all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the preferred stock. All net
realized capital gains, if any, will be distributed pro rata at least annually
to holders of Common Stock and any preferred stock. While any shares of
preferred stock are outstanding, the Fund may not declare any cash dividend or
other distribution on its Common Stock, unless at the time of such
declaration, (i) all accumulated preferred stock dividends, including any
Additional Distribution, have been paid, and (ii) the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
other distribution) is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated and unpaid
dividends thereon and any accumulated but unpaid Additional Distribution). If
the Fund's ability to make distributions on its Common Stock is limited, such
limitation could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company,
which would have adverse tax consequences for holders of Common Stock. See
"Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions may be taxable to shareholders under certain circumstances as
discussed below, whether they are reinvested in shares of the Fund or received
in cash.
TAXES
GENERAL
The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income and 90% of its tax-exempt net income (see below), the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.
30
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.
The Fund intends to qualify to pay "exempt-interest dividends" as defined in
Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its shareholders. Exempt-
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax-exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
shareholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's shareholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's Social Security and railroad retirement benefits subject to Federal
income taxes. Each shareholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such shareholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.
The portion of exempt-interest dividends paid from interest received by the
Fund from New York Municipal Bonds also will be exempt from New York State and
New York City personal income tax. However, exempt-interest dividends paid to
a corporate shareholder will be subject to New York State corporation
franchise tax and New York City general corporation tax. Shareholders subject
to income taxation by states other than New York will realize a lower after-
tax rate of return than New York shareholders, since the dividends distributed
by the Fund generally will not be exempt, to any significant degree, from
income taxation by such other states. The Fund will inform shareholders
annually as to the portion of the Fund's distributions which constitutes
exempt-interest dividends and the portion which is exempt from New York State
and New York City personal income tax. Interest on indebtedness incurred or
continued to purchase or carry Fund shares is not deductible for Federal
income tax purposes or for New York personal income tax purposes to the extent
attributable to exempt-interest dividends.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions
will be considered taxable ordinary income for Federal, New York State and New
York City income tax purposes. Distributions, if any, from an excess of net
long-term capital gains over net short-term capital losses derived from the
sale of securities or from certain transactions in futures or options
("capital gain dividends") are taxable as long-term capital gains for Federal
income tax purposes, regardless of the length of time the shareholder has
owned Fund shares and, for New York State and New York City tax purposes, are
treated as capital gains which are taxed at ordinary income tax rates. Recent
legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the
31
<PAGE>
Fund will provide its shareholders with a written notice designating the
amounts of any exempt-interest dividends, ordinary income dividends or capital
gain dividends, as well as the amount of capital gain dividends in the
different categories of capital gain referred to above. Distributions by the
Fund, whether from exempt-income, ordinary income or capital gains, will not
be eligible for the dividends received deduction allowed to corporations under
the Code.
All or a portion of the Fund's gain from the sale or redemption of tax-
exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
If the Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Internal Revenue Service ("Service") has taken the position in a revenue
ruling that if a RIC has two classes of shares, it may designate distributions
made to each class in any year as consisting of no more than such class's
proportionate share of particular types of income, including exempt-interest
income and net long-term capital gains (including the additional categories of
capital gains discussed above). A class's proportionate share of a particular
type of income is determined according to the percentage of total dividends
paid by the RIC during such year that was paid to such class. Consequently,
when both Common Stock and preferred stock are outstanding, the Fund intends
to designate distributions made to the classes as consisting of particular
types of income in accordance with each class's proportionate share of such
income. Thus, the Fund will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends between the holders of
Common Stock and preferred stock in proportion to the total dividends paid to
each class during the taxable year, or otherwise as required by applicable
law. Capital gain dividends (including the additional categories of capital
gains discussed above) will similarly be allocated between the two classes in
proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law. When capital gain or other taxable
income is allocated to holders of preferred stock pursuant to the allocation
rules described above, the terms of the preferred stock may require the Fund
to make an additional distribution to or otherwise compensate such holders for
the tax liability resulting from such allocation.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will
apply to interest received on certain "private activity bonds" issued after
August 7, 1986. Private activity bonds are bonds that, although tax-exempt,
are used for purposes other than those generally performed by governmental
units and that benefit non-governmental entities (e.g., bonds used for
industrial development or housing purposes). Income received on such bonds is
classified as an item of "tax preference" that could subject certain investors
in such bonds, including shareholders of the Fund, to an increased alternative
minimum tax. The Fund intends to purchase such "private activity bonds" and
will report to shareholders within 60 days after its taxable year-end the
portion of its dividends declared during the year that constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that
32
<PAGE>
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay an alternative minimum tax on
exempt-interest dividends paid by the Fund.
The Fund may invest in high yield securities, as previously described.
Furthermore, the Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or nontraditional instruments could be recharacterized as taxable ordinary
income.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net investment income and may,
therefore, jeopardize the Fund's qualification for taxation as a RIC. Upon any
failure to meet the asset coverage requirements of the 1940 Act, the Fund, in
its sole discretion, may redeem shares of preferred stock in order to maintain
or restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There can be no
assurance, however, that any such action would achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Fund currently contemplates
issuing may raise an issue as to whether distributions on such preferred stock
are "preferential" under the Code and, therefore, not eligible for the
dividends paid deduction. The Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Service to that effect. If the Fund
ultimately relies solely on a legal opinion when it issues such preferred
stock, there is no assurance that the Service would agree that dividends on
the preferred stock are not preferential. If the Service successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could be disqualified as a RIC. In this case, dividends on the Common
Stock would not be exempt from Federal income taxes. Additionally, the Fund
would be subject to the alternative minimum tax.
The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the
Fund's shares) could be viewed as a taxable distribution. If the discount is
viewed as a taxable distribution, it is also possible that the taxable
character of this discount would be allocable to all of the shareholders,
including shareholders who do not participate in the dividend reinvestment
plan. Thus, shareholders who do not participate in the dividend reinvestment
plan might be required to report as ordinary income a portion of their
distributions equal to their allocable share of the discount.
33
<PAGE>
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Under certain Code provisions, some taxpayers may be subject to 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to
the Fund or an exception applies, such options and financial futures contracts
that are "Section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each such option or
financial futures contract will be treated as sold for its fair market value
on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain
or loss. Application of these rules to Section 1256 contracts held by the Fund
may alter the timing and character of distributions to shareholders. The mark-
to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in financial
futures contracts or the related options.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New York State and New
York City tax laws presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury Regulations
promulgated thereunder, and the applicable New York State and New York City
tax laws. The Code, the Treasury Regulations and New York State and New York
City tax laws are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
34
<PAGE>
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a holder of Common Stock otherwise elects, all dividend and capital
gains distributions will be automatically reinvested by The Bank of New York,
as agent for shareholders in administering the Plan (the "Plan Agent"), in
additional shares of Common Stock of the Fund. Holders of Common Stock who
elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name, then to such nominee) by, The Bank
of New York, as dividend paying agent. Such participants may elect not to
participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to The Bank of New York,
as dividend paying agent, at the address set forth below. Participation in the
Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than
ten days prior to any dividend record date; otherwise, such termination or
resumption will be effective with respect to any subsequently declared
dividend or distribution.
Whenever the Fund declares an income dividend or a capital gains
distribution (collectively, referred to as "dividends") payable either in
shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of Common
Stock. The shares will be acquired by the Plan Agent for the participant's
account, depending upon the circumstances described below, either (i) through
receipt of additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding shares of
Common Stock on the open market ("open-market purchases") on the New York
Stock Exchange or elsewhere. If on the payment date for the dividend, the net
asset value per share of the Common Stock is equal to or less than the market
price per share of the Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be credited
to the participant's account will be determined by dividing the dollar amount
of the dividend by the net asset value per share on the date the shares are
issued, provided that the maximum discount from the then current market price
per share on the date of issuance may not exceed 5%. If on the dividend
payment date the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the Plan Agent
will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, participants in the
Plan will receive any dividends in newly issued shares.
In the event of a market discount on the dividend payment date, the Plan
Agent will have until the last business day before the next date on which the
shares trade on an "ex-dividend" basis or in no event more than 30 days after
the dividend payment date (the "last purchase date") to invest the dividend
amount in shares acquired in open-market purchases. It is contemplated that
the Fund will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase prices paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium
35
<PAGE>
during the purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend amount in
newly issued shares at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 101 Barclay Street, New York, New York 10286.
36
<PAGE>
MUTUAL FUND INVESTMENT OPTION
Purchasers of shares of Common Stock of the Fund through Merrill Lynch in
this offering will have an investment option consisting of the right to
reinvest the net proceeds from a sale of such shares (the "Original Shares")
in Class D initial sales charge shares of certain Merrill Lynch-sponsored
open-end mutual funds ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set
forth below are satisfied. First, the sale of the Original Shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class D Shares. Second, the Original Shares must have
been either acquired in this offering or be shares representing reinvested
dividends from shares of Common Stock acquired in this offering. Third, the
Original Shares must have been continuously maintained in a Merrill Lynch
securities account. Fourth, there must be a minimum purchase of $250 to be
eligible for the investment option. Class D shares of the mutual funds are
subject to an account maintenance fee at an annual rate of up to 0.25% of the
average daily net asset value of such mutual fund. The Eligible Class D Shares
may be redeemed at any time at the next determined net asset value, subject in
certain cases to a redemption fee. Prior to the time the shares of Common
Stock commence trading on the New York Stock Exchange, the distributor for the
mutual funds will advise Merrill Lynch Financial Consultants as to those
mutual funds that offer the investment option described above.
NET ASSET VALUE
Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
p.m., New York time) on the last business day in each week. For purposes of
determining the net asset value of a share of Common Stock, the value of the
securities held by the Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
The New York Municipal Bonds and Municipal Bonds in which the Fund invests
are traded primarily in the over-the-counter markets. In determining net asset
value, the Fund utilizes the valuations of portfolio securities furnished by a
pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. New York Municipal Bonds and Municipal
Bonds for which quotations are not readily available are valued at fair market
value on a consistent basis as determined by the pricing service using a
matrix system to determine valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors. The Board of Directors has determined
in good faith that the use of a pricing service is a fair method of
determining the valuation of portfolio securities. Positions in futures
contracts are valued at closing prices for such contracts established by the
exchange on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
The Fund determines and makes available for publication the net asset value
of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or
reclassify any unissued shares of capital stock by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption. Within approximately three months after completion of the offering
of the Common Stock described herein, the Fund intends to reclassify an amount
of unissued Common Stock as preferred stock and at that time to offer shares
of preferred stock representing approximately 40% of the Fund's capital
immediately after the issuance of such preferred stock. There is no assurance
that such preferred stock will be issued.
COMMON STOCK
Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Shareholders are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders upon liquidation of the
Fund. Shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred stock are outstanding, holders
of Common Stock will not be entitled to receive any net income of or other
distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act)
with respect to preferred stock would be at least 200% after giving effect to
such distributions. See "Preferred Stock" below.
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.
The Investment Adviser provided the initial capital for the Fund by
purchasing 6,667 shares of Common Stock of the Fund for $100,005. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.
PREFERRED STOCK
It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to purchase any
shares of preferred stock that might be issued. It is anticipated that the net
asset value per share of the preferred stock will equal its original purchase
price per share plus accumulated dividends per share.
The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately 40% of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately three months after completion of the offering of Common Stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of Common Stock
described in the Prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law
38
<PAGE>
and the Fund's Articles of Incorporation), the initial series of preferred
stock will be structured to carry either a relatively short-term dividend
rate, in which case periodic redetermination of the dividend rate will be made
at relatively short intervals (generally seven or 28 days), or a medium-term
dividend rate, in which case periodic redetermination of the dividend rate
will be made at intervals of up to five years. In either case, such
redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the
Fund is required to allocate taxable income to holders of the preferred stock,
it is anticipated that the terms of the preferred stock will require the Fund
to make an Additional Distribution (as defined in "Special Leverage
Considerations and Risks--Effects of Leverage") to such holders. The Board
also has indicated that it is likely that the liquidation preference, voting
rights and redemption provisions of the preferred stock will be as stated
below. The Fund's Articles of Incorporation, as amended, together with any
Articles Supplementary, is referred to below as the "Charter."
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of
the full amount of the liquidating distribution to which they are entitled,
the preferred stockholders will not be entitled to any further participation
in any distribution of assets by the Fund. A consolidation or merger of the
Fund with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Fund will not be deemed to be a
liquidation, dissolution or winding up of the Fund.
Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.
In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two
of the Fund's directors, and the remaining directors will be elected by all
holders of capital stock, voting as a single class. So long as any preferred
stock is outstanding, the Fund will have not less than five directors. If at
any time dividends on shares of the Fund's preferred stock shall be unpaid in
an amount equal to two full years' dividends thereon, the holders of all
outstanding shares of preferred stock, voting as a separate class, will be
entitled to elect a majority of the Fund's directors until all dividends in
default have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.
Redemption Provisions. It is anticipated that shares of preferred stock will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal
to their liquidation preference plus accumulated but unpaid dividends to the
date of redemption upon the occurrence of certain specified events, such as
the failure of the
39
<PAGE>
Fund to maintain asset coverage requirements for the preferred stock specified
by the rating agencies that issue ratings on the preferred stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A director may be removed
from office with or without cause, but only by vote of the holders of at least
66 2/3% of the votes entitled to be voted on the matter. A director elected by
all the holders of capital stock may be removed only by action of such
holders, and a director elected by the holders of preferred stock may be
removed only by action of such holders.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 66 2/3% of the Fund's shares of capital stock then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), or
(iii) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the by-laws, in
which case the affirmative vote of a majority of the Fund's shares of
capital stock is required. Following the proposed issuance of the preferred
stock, it is anticipated that the approval, adoption or authorization of
the foregoing would also require the favorable vote of a majority of the
Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.
In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the holders of at least 66 2/3% of the Fund's outstanding shares of capital
stock (including any preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by two-thirds of the total number
of Directors fixed in accordance with the by-laws), and, assuming preferred
stock is issued, the affirmative vote of a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also
would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. Shareholders of an open-end investment company
may require the company to redeem their shares of common stock at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If
the Fund is converted to an open-end investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and the
Common Stock would no longer be listed on a stock exchange.
40
<PAGE>
Conversion to an open-end investment company would also require redemption
of all outstanding shares of preferred stock and would require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the issuance of senior securities, the borrowing of money and the
purchase of illiquid securities.
The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under
Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Charter on file with the Securities
and Exchange Commission for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodial agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter") has
agreed, subject to the terms and conditions of a Purchase Agreement with the
Fund and the Investment Adviser, to purchase 6,700,000 shares of Common Stock
from the Fund. The Underwriter is committed to purchase all of such shares if
any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. There is no sales charge or underwriting
discount charged to investors on purchases of shares of Common Stock in the
offering. The Investment Adviser or an affiliate has agreed to pay the
Underwriter from its own assets a commission in connection with the sale of
shares of Common Stock in the offering in the amount of $ per share. Such
payment is equal to % of the initial public offering price per share. The
Underwriter also has advised the Fund that from this amount the Underwriter
may pay a concession to certain dealers not in excess of $ per share on
sales by such dealers. After the initial public offering, the public offering
price and other selling terms may be changed. Investors must pay for shares of
Common Stock purchased in the offering on or before January , 1998.
The Fund has granted the Underwriter an option, exercisable for 45 days
after the date hereof, to purchase up to 1,005,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial offering price.
The Underwriter may engage in certain transactions that stabilize the price
of the shares of Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares of
Common Stock.
If the Underwriter creates a short position in the shares of Common Stock in
connection with the offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing shares of Common Stock in the open
market. The Underwriter also may elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriter also may impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock
in the open market to reduce the Underwriter's short position
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<PAGE>
or to stabilize the price of the shares of Common Stock, it may reclaim the
amount of the selling concession from the selling group members who sold those
shares of Common Stock as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Fund nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares of Common Stock. In addition,
neither the Fund nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the shares of
the Common Stock. Application will be made to list the Fund's shares of Common
Stock on the New York Stock Exchange. However, during an initial period which
is not expected to exceed two weeks from the date of this Prospectus, the
Fund's Common Stock will not be listed on any securities exchange.
Additionally, during such period, the Underwriter does not intend to make a
market in the Fund's Common Stock, although a limited market may develop.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. In order to meet the requirements for listing,
the Underwriter has undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial owners.
The Fund anticipates that the Underwriter may from time to time act as a
broker in connection with the execution of its portfolio transactions. The
Fund has obtained an exemptive order permitting it to engage in certain
principal transactions with the Underwriter involving high quality, short-
term, tax-exempt securities subject to certain conditions. See "Investment
Restrictions" and "Portfolio Transactions."
The Underwriter is an affiliate of the Investment Adviser of the Fund.
The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act of
1933.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares
of Common Stock of the Fund will be The Bank of New York, 101 Barclay Street,
New York, New York 10286.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Fund and the Underwriter by Brown & Wood LLP, New
York, New York.
EXPERTS
The statement of assets, liabilities and capital of the Fund included in
this Prospectus has been so included in reliance on the report of ,
independent auditors, and on their authority as experts in auditing and
accounting. The selection of independent auditors is subject to ratification
by shareholders of the Fund.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder, MuniHoldings New York Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital
of MuniHoldings New York Fund, Inc. as of , 1998. This financial
statement is the responsibility of the Fund's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of MuniHoldings New
York Fund, Inc. as of , 1998 in conformity with generally accepted
accounting principles.
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MUNIHOLDINGS NEW YORK FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
, 1998
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $100,005
Deferred organization expenses (Note 1).............................
--------
Total assets......................................................
--------
LIABILITIES
Accrued expenses (Note 1)...........................................
--------
NET ASSETS............................................................ $100,005
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares
authorized; 6,667 shares issued and outstanding (Note 1)........... $ 667
Paid-in Capital in excess of par.................................... 99,338
--------
Total Capital-Equivalent to $15.00 net asset value per share of
common stock (Note 1).............................................. $100,005
========
</TABLE>
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
NOTE 1. ORGANIZATION
The Fund was incorporated under the laws of the State of Maryland on
December 4, 1997 as a closed-end, non-diversified management investment
company and has had no operations other than the sale to Fund Asset
Management, L.P. (the "Investment Adviser") of an aggregate of 6,667 shares
for $100,005 on January , 1998. The General Partner of the Investment Adviser
is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
Deferred organization costs will be amortized on a straight-line basis over
a five-year period beginning with the commencement of operations of the Fund.
NOTE 2. MANAGEMENT ARRANGEMENTS
The Fund has engaged the Investment Adviser to provide investment advisory
and management services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.55 of 1% of
the average weekly net assets of the Fund.
NOTE 3. FEDERAL INCOME TAXES
The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code
of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders.
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<PAGE>
APPENDIX I
ECONOMIC CONDITIONS IN NEW YORK
The information set forth below is derived from the official statements
prepared in connection with the issuance of New York Municipal Bonds and other
sources that are generally available to investors. The following information
is provided as general information intended to give a recent historical
description and is not intended to indicate future or continuing trends in the
financial or other conditions of New York City (the "City") or New York State
(the "State" or "New York"). The Fund has not independently verified this
information.
In recent years, the State, some of its agencies, instrumentalities and
public authorities and certain of its municipalities have faced serious
financial difficulties that could have an adverse effect on the sources of
payment for or the market value of the New York Municipal Bonds in which the
Fund invests.
NEW YORK CITY
General. More than any other municipality, the fiscal health of the City has
a significant effect on the fiscal health of the State. After noticeable
improvements in the City's economy during the calendar year 1994 economic
growth slowed in calendar year 1995, and thereafter improved commencing in
calendar year 1996, reflecting improved securities industry earnings and
employment in other sectors. The City's current four-year financial plan
assumes that moderate economic growth will exist through calendar year 2001
with moderate job growth and wage increases.
For each of the 1981 through 1997 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial gaps
between forecast revenues and forecast expenditures in recent fiscal years in
order to maintain balanced operating results. There can he no assurance that
the City will continue to maintain balanced operating results as required by
State law without additional reductions in City services or entitlement
programs or tax or other revenue increases that could adversely affect the
City's economic base.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's four-year financial plan, including the City's current financial
plan for the 1998 through 2001 fiscal years (the "1998-2001 Financial Plan" or
"City Financial Plan"). The City's projections set forth in the City Financial
Plan are based on various assumptions and contingencies that are uncertain and
may not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to meet
its annual cash flow and financing requirements.
Implementation of the City Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets.
The City's financing program for fiscal years 1998 through 2001 contemplates
the issuance of $5.8 billion of general obligation bonds and $7.1 billion of
bonds to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority") to finance City capital projects. In 1997,
the State enacted the New York City Transitional Finance Authority Act (the
"Finance Authority Act"), which created the Transitional Finance Authority, to
assist the City in keeping the City's indebtedness within the forecast level
of the constitutional restrictions on the amount of debt the City is
authorized to incur. The Transitional Finance Authority is authorized to issue
up to $7.5 billion in long term
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<PAGE>
debt. On June 2, 1997, an action was brought in the State Supreme Court,
Albany County, seeking a declaratory judgment declaring the Finance Authority
Act to be unconstitutional. If the Finance Authority Act were voided, and
depending on whether the State took other action that would provide relief to
the City under the general debt limit, the City might be required to curtail
its currently defined capital program. In addition, the City issues revenue
notes and tax anticipation notes to finance its seasonal working capital
requirements. The success of projected public sales of City bonds and notes,
New York City Municipal Water Finance Authority (the "Water Authority") bonds
and Transitional Finance Authority bonds will be subject to prevailing market
conditions, and no assurance can be given that such sales will be completed.
If the City were unable to sell its general obligation bonds and notes or the
Water Authority or the Transitional Finance Authority were unable to sell its
bonds, the City would be prevented from meeting its planned operating and
capital expenditures.
1998-2001 Financial Plan. On June 10, 1997 the City submitted to the New
York State Financial Control Board (the "Control Board") the Financial Plan
for the 1998 through 2001 fiscal years that reflects the City's expense and
capital budgets for the 1998 fiscal year that were adopted on June 6, 1997.
The City Financial Plan projects revenues and expenditures for the 1998 fiscal
year (July 1, 1997 through June 30, 1998) balanced in accordance with GAAP.
The City Financial Plan sets forth gap-closing actions to eliminate a
previously projected gap for the 1998 fiscal year, after taking into account
the prepayment in the 1997 fiscal year of $1.3 billion of debt service due in
the 1998 and 1999 fiscal years. The gap-closing actions for the 1998 fiscal
year include (i) additional agency actions; (ii) the proposed sale of various
assets; (iii) additional State aid; and (iv) entitlement savings in Medicaid.
The City Financial Plan also sets forth projections for the 1999 through 2001
fiscal years and projects budget gaps of $1.8 billion, $2.8 billion and $2.6
billion for the 1999 through 2001 fiscal years, respectively. The City has
outlined a gap-closing program for these years that assumes additional agency
actions, savings from restructuring City government and privatization and
procurement initiatives, additional revenue initiatives and asset sales,
additional State aid, additional entitlement cost containment initiatives and
the availability of funds from the General Reserve.
The City Financial Plan includes a proposed tax reduction program totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively. The City Financial Plan assumes that portions
of these reductions will be offset by increased State aid totaling $47
million, $254 million, $472 million and $722 million in the 1998 through 2001
fiscal years, respectively.
The City's projections set forth in the City Financial Plan are based on
various assumptions and contingents that are uncertain and may not
materialize. Such assumptions and contingencies include the condition of the
regional and local economies, the impact on real estate tax revenues of the
real estate market, employment growth, wage increases for City employees
consistent with those assumed in the City Financial Plan, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, continuation of interest earning assumptions for pension funds
assets, the ability of the City's hospital and educational entities to take
actions to offset potential budget shortfalls, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate
relief, the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements, approval by the Governor and the State Legislature of the
extension of certain personal income tax surcharges, that are scheduled to
expire in 1998.
The City Financial Plan is also subject to the ability of the City to
implement the expenditure reductions and to obtain the savings outlined in the
City Financial Plan. In addition, the City may incur expenditures that exceed
those projected in the City Financial Plan. There can be no assurance that
additional gap-closing measures
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will not be required to enable the City to achieve a balance budget in a
particular fiscal year. Certain identified savings are subject to negotiation
with the City's municipal unions. Various other actions proposed for the 1998
through 2001 fiscal years are subject to approval by the Governor and the
State Legislature and the proposed reductions in spending for entitlement
programs may be subject to legal challenge.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1997-1998 fiscal year or subsequent fiscal years, such developments could
result in reductions in anticipated State aid to the City. The State did not
adopt its budget for the 1997-1998 fiscal year until August 4, 1997, more than
four months after April 1, 1997, the beginning of the fiscal year. In
addition, there can be no assurance that State budgets in future fiscal years
will be adopted by the April 1 statutory deadline and that there will not be
adverse effects on the City's cash flow and additional City expenditures as a
result of such reductions or delays.
The City's financial plans have been the subject of extensive public comment
and criticism. On September 18, 1997, the City comptroller issued a report
commenting on developments with respect to the 1998 fiscal year. The report
noted that the City's adopted budget, which is reflected in the City Financial
Plan, had assumed additional State resources of $612 million in the 1998
fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while
the City will receive $322 million more in education aid in the 1998 fiscal
year than assumed in the City's adopted budget, it is unlikely that the
funding will be entirely available for gap-closing purposes. In additional,
the report noted that the City's financial statements currently contain
approximately $643 million in uncollected State education aid receivables from
prior years as a result of the failure of the State to appropriate funds to
pay these claims, and that the staff of the Board of Education ("BOE") has
indicated that an additional $302 million in prior year claims is available
for accrual. The report stated that the City Comptroller maintains the
position that no further accrual of prior year aid will take place, including
$75 million in aid assumed in the City's adopted budget for the 1998 fiscal
year, unless the State makes significant progress to retire the outstanding
prior year receivables. On October 28, 1997, the City Comptroller issued a
subsequent report commenting on recent developments. With respect to the 1997
fiscal year, the report noted that the City ended the 1997 fiscal year with an
operating surplus of $1.367 billion, before certain expenditures and
discretionary transfers, of which $1.362 billion was used for expenditures due
in the 1998 fiscal year. With respect to tax revenues for the 1998 fiscal
year, the report noted that total tax revenues in the first quarter of the
1998 fiscal year were $244.3 million above projections in the Financial Plan,
excluding audit collections which were $31.2 million less than projected. The
report stated that the increased tax revenues included $110.3 million of
greater than projected general property tax receipts, which resulted, in part,
from a prepayment discount program, and increased revenues from the personal
income, banking corporation, general corporation and unincorporated business
taxes. The report noted that Wall Street profits exceeded expectations in the
first half of the 1997 calendar year. However, the report noted that the stock
market in the last two weeks of October declined as a result of currency
turmoil in Southeast Asia. The report noted that, while tax revenues in the
1998 fiscal year should not be significantly affected by the recent stock
market activity, since there is a lag between activity on Wall Street and City
tax revenues, if the stock market declines, tax revenue forecasts for
subsequent years will have to be revised downward. On July 2, 1997, the staff
of the Office of the State Deputy Comptroller of New York (the "OSDC") issued
a report on the City Financial Plan. For the 1998 fiscal year, the report
projected a potential surplus of $190 million. The report also identified
risks of $518 million, $1.1 billion, $1.3 billion and $1.4 billion for the
1998 through 2001 fiscal years, respectively. On July 15, 1997, the staff of
the Control Board issued a report commenting on the City Financial Plan. The
report stated that, while the City should end the 1998 fiscal year with its
budget in balance, the City
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Financial Plan still contains large gaps beginning in the 1999 fiscal year,
reflecting revenues which are not projected to grow during the City Financial
Plan period and expenditures which are projected to grow at about the rate of
inflation. The principal risks of revenues and cost savings to the City which
may not materialize, identified in the report, included (i) potential tax
revenues shortfalls based on historical average trends; (ii) BOE's structural
gap, uncertain State funding of BOE and implementation by BOE of various
unspecified actions; (iii) the proposed sale of certain assets in the 1998
fiscal year which could be delayed; (iv) assumed additional State actions; (v)
revenues from the extension of the personal income tax surcharge beyond
December 31, 1998, which requires State legislation; and (vi) the receipt of
revenues from the Port Authority in the 1999 through 2001 fiscal years,
respectively, which is the subject of arbitration. Taking into account risks
identified in the report and the gaps projected in the City Financial Plan,
the report projected a gap of $485 million for the 1998 fiscal year, which
could be offset by available reserves, and gaps of $2.7 billion, $4.1 billion
and $4.0 billion for the 1999 through 2001 fiscal years, respectively. The
report also noted that (i) if the securities industry or economy slows down to
a greater extent than projected, the City could face sudden and unpredictable
changes to its forecast; (ii) the City's entitlement reduction assumptions
require a decline of historic proportions in the number of eligible welfare
recipients; (iii) the City has not yet shown how the City's projected debt
service, which would consume 20% of tax revenues by the 1999 fiscal year, can
be accommodated on a recurring basis; (iv) the City is deferring recommended
capital maintenance; and (v) continuing growth in enrollment at BOE has helped
create projected gaps of over $100 million annually at BOE.~ On October 31,
1996 the City's Independent Budget Office (the "IBO") released a report
assessing the costs that could be incurred by the City in response to the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (the
"1996 Welfare Act"). The IBO report noted that if the requirement that all
recipients work after two years of receiving benefits is enforced, these
additional costs could be substantial starting in 1999, reflecting costs for
worker training and supervision of new workers and increased child care costs.
The report further notes that, if economic performance weakened, resulting in
an increased number of public assistance cases, potential costs to the City
could substantially increase. The report noted that the new welfare law's most
significant fiscal impact is likely to occur in the years 2002 and beyond,
reflecting the full impact of the lifetime limit on welfare participation,
which only will begin to be felt in 2002. In addition, the report noted that,
given the State constitutional requirement to care for the needy, the 1996
Welfare Act might well prompt a migration of benefit-seekers into the City.
The report concluded that the impact of the 1996 Welfare Act on the City will
ultimately depend on decisions of State and City officials, including the
allocation of block grant funds between the State and New York local
governments and the divisions between the State and local governments of
welfare costs not funded by the Federal Government, the performance of the
local economy and the behavior of thousands of individuals in response to the
new system. On August 25, 1997, the IBO issued a report relating to recent
developments regarding welfare reform. The report noted that Federal
legislation adopted in August 1997, modified certain aspects of the 1996
Welfare Act, by reducing SSI eligibility restrictions for certain legal aliens
residing in the country as of August 22, 1996, resulting in the continuation
of Federal benefits, by providing funding to the states to move welfare
recipients from public assistance and into jobs and by providing continued
Medicaid coverage for those children who lose SSI due to stricter eligibility
criteria. In addition, the report noted that the State had enacted the Welfare
Reform Act of 1997 which, among other things, requires the City to achieve
work quotas and other work requirements and requires all able-bodied
recipients to work after receiving assistance for two years. The report noted
that this provision could require the City to spend substantial funds over the
next several years for workfare and day care in addition to the funding
reflected in the City Financial Plan. The report also noted that the State
Welfare Reform Act of 1997 established a Food Assistance Program designed to
replace Federal food stamp benefits for certain classes of legal aliens denied
eligibility for such benefits by the 1996 Welfare Act. The report
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noted that if the City elects to participate in the Food Assistance Program,
it will be responsible for 50% of the costs for the elderly and disabled.
Ratings. As of October 30, 1997, Moody's Investors Service, Inc. ("Moody's")
rated the~ City's outstanding general obligation bonds "Baa 1," Standard &
Poor's, a division of The McGraw-Hill Companies Inc. ("Standard & Poor's")
rated such bonds BBB+ and Fitch Investors Service, L.P. ("Fitch") rated such
Bonds A-. On July 10, 1995, Standard & Poor's revised downwards its ratings on
outstanding general obligation bonds of the City from A- to BBB+. On July 17,
1997, Moody's changed its outlook on City bonds to positive from stable. Such
ratings reflect only the view of Moody's, Standard & Poor's and Fitch, from
which an explanation of the significance of such ratings may be obtained.
There is no assurance that such ratings will continue for any given period of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of City bonds.
Outstanding Indebtedness. As of June 30, 1997, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.2 and $3.7 billion of outstanding net long-term debt. As of May 1, 1997,
the New York City Municipal Water Finance Authority (the "Water Authority")
had approximately $6.8 billion of aggregate principal amount of outstanding
bonds and $600 million aggregate principal amount of outstanding commercial
paper notes.
Debt service on Water Authority obligations is secured by fees and charges
collected from the users of the City's water and sewer system. State and
Federal regulations require the City's water supply to meet certain standards
to avoid filtration. The City's water supply now meets all technical standards
and the City has taken the position that increased regulatory, enforcement and
other efforts to protect its water supply, will prevent the need for
filtration. On May 6, 1997, the U.S. Environmental Protection Agency granted
the City a filtration avoidance waiver through April 15, 2002 in response to
the City's adoption of certain watershed regulations, which became effective
May 1, 1997. The estimated incremental cost to the City of implementing this
Watershed Memorandum of Agreement, beyond investments in the watershed which
are planned independently, is approximately $400 million. Preliminary
estimates of the costs of such filtration, if it were required, are from $4
billion to $8 billion. Such an expenditure could cause significant increases
in City water and sewer charges.
Litigation. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon; the City's ability
to carry out the City Financial Plan. As of June 30, 1997, the City estimated
its potential future liability on account of all outstanding claims to be
approximately $3.5 billion.
NEW YORK STATE
Current Economic Outlook. The national economy has resumed a more robust
rate of growth after a "soft landing" in 1995, with approximately 14 million
jobs added since early 1992. Although the State has added approximately
300,000 jobs since late 1992, employment growth in the state has been hindered
during recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense and banking industries.
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The forecast of the State's economy shows moderate expansion during the
first half of calendar 1997 with the trend continuing through the year. On an
average annual basis, employment growth in the State, although less than that
for the nation, is expected to be up substantially from the 1996 rate.
Personal income is expected to record moderate gains in 1997. The State's
Overall employment growth is projected to be 1.4 percent in 1997 and 1.0
percent in 1998 while personal income growth is projected to be 6.1 percent in
1997 and 4.5 percent in 1998.
The 1997-1998 Financial Plan. The State's current fiscal year commenced on
April 1, 1997, and ends on March 31, 1998. The State's budget for the 1997-
1998 fiscal year was adopted by the Legislature on August 4, 1997, more than
four months after the start of the fiscal year. Prior to adoption of the
budget, the Legislature enacted necessary appropriations for state-supported
debt service. The State Financial Plan for the 1997-1998 fiscal year was
formulated on August 11, 1997 and is based on the State's budget as enacted by
the Legislature, as well as actual results for the first quarter of the
current fiscal year.
The 1997-1998 Financial Plan projects General Fund receipts of $35.09
billion, an increase of approximately 6 percent from the previous fiscal year.
General Fund disbursements are projected at $34.60 billion, an increase of
approximately 5 percent from the previous fiscal year. Tax receipts are
projected to grow by approximately 5 percent in fiscal year 1997-1998. The
1997-1998 Financial Plan projects budget balance on a cash basis. The State
closed a previously projected budget gap of approximately $2.3 billion for the
1997-1998 fiscal year. Gap-closing actions include cost containment in State
Medicaid, the use of the $1.4 billion 1996-1997 fiscal year budget surplus to
finance current year spending, control on State agency spending and other
actions. Total non-recurring resources included in the 1997-1998 Financial
Plan are projected to be 0.7 percent of total General Fund receipts. There can
be no assurance that the cost containment and spending reduction programs can
be implemented as proposed.
General Fund payments for Medicaid are projected to be $5.42 billion,
virtually unchanged from the level of $5.38 billion in 1996-1997. This slow
growth is due primarily to continuation of cost containment measures enacted
in 1995-1996 and 1996-1997, new reforms included in the 1997-1998 adopted
budget and forecasts for slower underlying growth. Other social service
spending is forecast to increase by only $115 million to $3.15 billion in
1997-1998. This slow growth stems from continued State efforts to reduce
welfare fraud, declining caseloads, and changes produced by federal welfare
legislation enacted in 1996.
The 1997-1998 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax
relief, utility gross receipts tax reductions, permanent reductions in the
State sales tax on clothing, and elimination of assessments on medical
providers. The various elements of the State and local tax and assessment
reductions have little or no impact on the 1997-1998 Financial Plan, and do
not begin to materially affect the outyear projections until the State's 1999-
2000 fiscal year.
The 1997-1998 Financial Plan projects a budget imbalance of up to $1.68
billion for the 1998-1999 fiscal year. The expected gap is smaller than the
three previous budget gaps closed by the State. The Governor is required to
submit a balanced budget to the State Legislature and has indicated that he
will close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. There can be no assurance, however, that the State's actions will
be sufficient to preserve budget balances in the then current or future fiscal
years.
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Certain actions taken in the State's 1997-1998 fiscal year, such as Medicaid
and welfare reforms, are expected to provide recurring savings in future
fiscal years. Continued controls on State agency spending will also provide
recurring savings. The availability of $530 million in reserves created as a
part of the 1997-1998 adopted budget and included in the Financial Plan is
expected to benefit the 1998-1999 fiscal year. Sustained growth in the State's
economy and continued declines in welfare caseload and health care costs would
also produce additional savings in the 1998-1999 Financial Plan. Finally,
various federal actions, including the potential beneficial effect on State
tax receipts from changes to the federal tax treatment of capital gains, could
potentially provide significant benefits to the State over the next several
years.
Certain actions taken in the 1997-1998 adopted budget add pressure to future
budget balance in New York State. For example, the fiscal effects of tax
reductions adopted in the 1997-1998 budget are projected to grow more
substantially beyond the 1998-1999 fiscal year, with incremental costs
averaging in excess of $1.3 billion annually over the last three years of the
tax reduction program. These incremental costs reflect the phase-in of State-
funded school property tax and local income tax relief, the phase-out of the
assessments on medical providers, and reductions in estate and gift levies,
utility gross receipts taxes, and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-2002. In addition,
the 1997-1998 budget included multi-year commitments for school aid and pre-
kindergarten early learning programs which could add as much as $1.4 billion
in costs when fully annualized in fiscal year 2001-2002. These spending
commitments are subject to annual appropriation.
The 1997-1998 Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and State
economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, federal
financial and monetary policies, the availability of credit and the condition
of the world economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience worse-than-
predicted results in the 1997-1998 and subsequent fiscal years, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
Owing to these and other factors, the State may fact substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
The 1996-1997 Fiscal Year. The State ended its 1996-1997 fiscal year on
March 31, 1997 in balance on a cash basis, with a 1996-1997 General Fund cash
surplus as reported by the State Division of the Budget of approximately $1.4
billion that has been used to finance the 1997-1998 Financial Plan. The
surplus results primarily from higher-than-expected revenues and lower-than-
expected spending for social service programs. The General Fund closing
balance was $433 million. General Fund receipts and transfers from other funds
for the 1996-1997 fiscal year totaled $33.04 billion, an increase of 0.7
percent from the 1995-1996 fiscal year (excluding deposits into the tax refund
reserve account). General Fund disbursements and transfers to other funds
totaled $32.90 billion for the 1996-1997 fiscal year, an increase of 0.7
percent from the 1995-1996 fiscal year.
Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance,
with a reported 1995-1996 General Fund cash surplus of $445 million. General
Fund receipts and transfers from other funds totaled
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$32.81 billion, a decrease of 1.1 percent from the 1994-1995 levels. General
Fund disbursements and transfers to other funds totaled $32.68 billion for the
1995-1996 fiscal year, a decrease of 2.2 percent from the 1994 1995 levels.
Prior to adoption of the State's 1995-1996 fiscal year budget, the State had
projected a potential budget gap of approximately $5 billion, which was closed
primarily through spending reductions, cost containment measures, State agency
actions and local assistance reforms.
The State ended its 1994-1995 fiscal year with the General Fund in balance.
General Fund receipts and transfers from other funds totaled $33.16 billion,
an increase of 2.9 percent from the 1993-1994 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion, an increase
of 4.7 percent from the 1993-1994 levels.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain Payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC has issued bonds to provide net proceeds of $4.7 billion completing
the program. The impact of LGAC's borrowing is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing.
Financing Activities. State financing activities include general obligation
debt of the State and State-guaranteed debt, to which the full faith and
credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.
As of March 31, 1997, the total amount of outstanding general obligation
debt was approximately $5.028 billion, including $293.6 million in BANs. The
total amount of moral obligation debt was approximately $4.069 billion, and
$22.499 billion of bonds issued primarily in connection with lease-purchase
and contractual-obligation financing of State capital programs were
outstanding. Furthermore, the adopted 1997-1998 budget proposes a new $2.4
billion general obligation bond proposal for school facilities to be submitted
to the voters in November 1997.
Public Authorities. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which
apply to the State itself, and may issue bonds and notes within the amounts
of, and as otherwise restricted by, their legislative authorization. As of
September 30,1996, there were 17 public authorities that had outstanding debt
of $100 million or more, and the aggregate outstanding debt, including
refunding bonds, of all State public authorities was $75.4 billion. The
State's access to the public credit markets could be impaired and the market
price of its outstanding debt may be adversely affected, if any of its public
authorities were to default in their respective obligations.
Ratings. Currently, Moody's, Standard & Poor's and Fitch rate New York
State's outstanding general obligation bonds "A2," A and A+, respectively.
Standard & Poor's revised its ratings upward from A- to A on August 28, 1997.
Ratings reflect only the respective views of such organizations, and
explanation of the significance of such ratings must be obtained from the
rating agency furnishing the same. There is no assurance that a particular
rating will continue for any given period of time or that any such rating will
not be revised downward or withdrawn entirely if, in the judgment of the
agency originally establishing the rating,
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circumstances so warrant. A downward revision or withdrawal of such ratings,
or either of them, may have an effect on the market price of the New York
Municipal Bonds in which the Fund invests.
Litigation. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. State programs are
frequently challenged on State and Federal constitutional grounds. Adverse
developments in legal proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan in
any given fiscal year. There can be no assurance that an adverse decision in
one or more legal proceedings would not exceed the amount the State reserves
for the payment of judgments or materially impair the State's financial
operations. In its audited financial statements for the fiscal year ended
March 31, 1997, the State reported its estimated liability for awarded and
anticipated unfavorable judgments at $364 million.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1997-1998 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1997-1998 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or the
State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2
denotes "high quality" with ample margins of protection; MIG 3/VMIG3 notes are
of "favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
MUNICIPAL DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers or other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
55
<PAGE>
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I.
Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
II.
Nature of and provisions of the obligation; and
III.
Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment to the obligation.
BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
B significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest degree of
CC speculation. While such bonds will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
D Debt rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
56
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATING
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus "+"
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
57
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of these insurers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds and, therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
58
<PAGE>
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
RATINGS OUTLOOK
An outlook is used to describe the most likely direction of any
rating change over the intermediate term. It is described as a
"Positive" or "Negative." The absence of a designation indicates
a stable outlook.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
59
<PAGE>
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the basis of
D their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
60
<PAGE>
APPENDIX III
TAXABLE EQUIVALENT YIELDS FOR 1998/1/
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF
-----------------------------------------------
1998
TAXABLE INCOME 1998 NEW YORK 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
-------------------------------------FEDERAL TAX STATE TAX
SINGLE RETURN/2/ JOINT RETURN/2/ BRACKET BRACKET/3/ IS EQUAL TO A NEW YORK STATE TAXABLE YIELD OF
----------------- ----------------- ----------- ---------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,001-$ 25,351 $ 40,001-$ 42,350 15.0% 6.85% 6.31 6.95 7.58 8.21 8.84 9.47
$ 25,351-$ 61,400 $ 42,351-$102,300 28.0% 6.85% 7.46 8.20 8.95 9.69 10.44 11.18
$ 61,401-$128,100 $102,301-$155,950 31.0% 6.85% 7.78 8.56 9.34 10.11 10.89 11.67
$128,101-$278,450 $155,951-$278,450 36.0% 6.85% 8.39 9.23 10.06 10.90 11.74 12.58
Over $278,450 Over $278,450 39.6% 6.85% 8.89 9.78 10.66 11.55 12.44 13.33
</TABLE>
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF
-----------------------------------------------
1998 1998
TAXABLE INCOME 1998 NEW YORK NEW YORK 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
-------------------------------------FEDERAL TAX STATE TAX CITY TAX
SINGLE RETURN/2/ JOINT RETURN/2/ BRACKET BRACKET/3/ BRACKET/4/ IS EQUAL TO A NEW YORK STATE TAXABLE YIELD OF
----------------- ----------------- ----------- ---------- ---------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,351-$ 50,000 -- 28.0% 6.85% 4.40% 7.83 8.61 9.39 10.18 10.96 11.74
-- $ 42,351-$ 45,000 28.0% 6.85% 4.39% 7.83 8.61 9.39 10.17 10.96 11.74
-- $ 45,001-$ 90,000 28.0% 6.85% 4.46% 7.83 8.61 9.39 10.18 10.96 11.74
$ 50,001-$ 61,400 -- 28.0% 6.85% 4.46% 7.83 8.62 9.40 10.18 10.97 11.75
-- $ 90,001-$102,300 28.0% 6.85% 4.46% 7.83 8.62 9.40 10.18 10.97 11.75
$ 61,401-$128,100 $102,301-$155,950 31.0% 6.85% 4.46% 8.17 8.99 9.81 10.62 11.44 12.26
$128,101-$278,450 $155,951-$278,450 36.0% 6.85% 4.46% 8.81 9.69 10.57 11.45 12.34 13.22
Over $278,450 Over $278,450 39.6% 6.85% 4.46% 9.34 10.27 11.20 12.14 13.07 14.00
</TABLE>
- --------
/1/An investor's marginal tax rates may exceed the rates shown in the above
tables if such investor does not itemize deductions for Federal income tax
purposes or due to the reduction or possible elimination of the personal
exemption deduction for high-income taxpayers and an overall limit on
itemized deductions. For investors who pay alternative minimum tax, tax-free
yields may be equivalent to lower taxable yields than those shown above. As
for shareholders who are subject to income taxation by states other than New
York (including shareholders who pay non-resident New York State or New York
City income taxes), tax free yields may be equivalent to lower taxable yields
than those shown above. The above tables do not apply to corporate investors.
The tax characteristics of the Fund are described more fully elsewhere in
this Prospectus. Consult your tax adviser for further details. These charts
are for illustrative purposes only and cannot be taken as an indication of
anticipated Fund performance.
/2/The above tables are based on the Federal taxable income brackets which are
adjusted annually for inflation.
/3/A supplemental tax will also apply to filers with adjusted gross income
between $100,000 and $150,000 which phases out the benefit of the lower
marginal brackets. This adjustment is not reflected in the table above.
/4/This is the highest New York City effective marginal rate that applies to
any income level in the range listed on the left of this chart. Nominally
the top marginal rate is 3.4% for net taxable income over $90,000 for joint
filers and net taxable income over $50,000 for single filers. A rate of
3.35% applies to income between $45,000 and $90,000 for joint filers and
between $25,000 and $50,000 for single filers and a rate of 3.3% applies to
income between $21,600 and $45,000 for joint filers and between $12,000 and
$25,000 for single filers. A .51% temporary tax surcharge for income over
$14,400 for joint filers and $8,400 for single filers (.55% for income
between $27,000 and $45,000 for joint filers and between $15,000 and $25,000
for single filers) applies until the end of 1998. An additional tax
surcharge equal to 14% of the sum of the New York City personal income tax
and the temporary tax surcharge applies for 1998.
61
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors and Special Considerations.................................... 8
Fee Table.................................................................. 10
The Fund................................................................... 11
Use of Proceeds............................................................ 11
Investment Objective and Policies.......................................... 11
Risks and Special Considerations of Leverage............................... 21
Investment Restrictions.................................................... 24
Directors and Officers..................................................... 25
Investment Advisory and Management Arrangements............................ 27
Portfolio Transactions..................................................... 29
Dividends and Distributions................................................ 30
Taxes...................................................................... 30
Automatic Dividend Reinvestment Plan....................................... 35
Mutual Fund Investment Option.............................................. 37
Net Asset Value............................................................ 37
Description of Capital Stock............................................... 38
Custodian.................................................................. 41
Underwriting............................................................... 41
Transfer Agent, Dividend Disbursing Agent and Registrar.................... 42
Legal Opinions............................................................. 42
Experts.................................................................... 42
Independent Auditors' Report............................................... 43
Statement of Assets, Liabilities and Capital............................... 44
Appendix I................................................................. 45
Appendix II................................................................ 54
Appendix III............................................................... 61
</TABLE>
---------------
UNTIL APRIL , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,700,000 SHARES
MUNIHOLDINGS NEW YORK
FUND, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
JANUARY , 1998
CODE 19000-0198
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements
Report of Independent Auditors
Statement of Assets, Liabilities and Capital as of , 1998
(2) Exhibits:
<TABLE>
<C> <S>
(a)(1) --Articles of Incorporation(a)
(a)(2) --Articles of Amendment(a)
(b) --By-Laws(a)
(c) --Not applicable
(d)(1) --Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant(b)
(d)(2) --Form of specimen certificate for shares of Common Stock of the
Registrant(a)
(e) --Form of Dividend Reinvestment Plan(a)
(f) --Not applicable
(g) --Form of Investment Advisory Agreement between the Registrant and
the Investment Adviser(a)
(h)(1) --Form of Purchase Agreement(a)
(h)(2) --Merrill Lynch Standard Dealer Agreement(a)
(i) --Not applicable
(j) --Custodian Contract between the Fund and *
(k) --Registrar, Transfer Agency and Service Agreement between the Fund
and *
(l) --Opinion and Consent of Brown & Wood LLP*
(m) --Not applicable
(n) --Consent of , independent auditors for the Fund*
(o) --Not applicable
(p) --Certificate of Fund Asset Management, L.P.*
(q) --Not applicable
(r) --Not applicable
</TABLE>
- --------
(a) Filed on December 23, 1997 as an Exhibit to the Registrant's Registration
Statement on Form N-2.
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article
XIII of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement; and to Article II, Article III
(sections 1, 2, 3, 5 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws, filed as Exhibit
(b) to this Registration Statement.
* To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibit (h).
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees..................................................... $ *
Stock Exchange listing fee............................................ *
Printing (other than stock certificates).............................. *
Engraving and printing stock certificates............................. *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
NASD fees............................................................. *
Miscellaneous......................................................... *
-----
Total............................................................... $ *
=====
</TABLE>
- --------
* To be provided by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The information in the Prospectus under the caption "Investment Advisory and
Management Arrangements" and in Note 1 to the Statement of Assets, Liabilities
and Capital is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
There will be one record holder of the Common Stock, par value $0.10 per
share, as of the effective date of this Registration Statement.
ITEM 29. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, filed as Exhibit
(a)(1) to this Registration Statement, Article VI of the Registrant's By-Laws,
filed as Exhibit (b) to this Registration Statement, and the Investment
Advisory Agreement, a form of which is filed as Exhibit (g)(1) to this
Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act") may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in connection with any successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Fund will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section Six of the Purchase Agreement, a form of which
is filed as Exhibit (h)(1) hereto, for provisions relating to the
indemnification of the underwriter.
C-2
<PAGE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of
MLAM, acts as investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Financial
Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc., and for the
following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings California Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Fund,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest
Florida Fund, MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Government Bond Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill
Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc.,
Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646.
The address of the Investment Adviser, MLAM, Merrill Lynch Funds Distributor,
Inc. ("MLFD"), Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. also is P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World
Financial Center, 250 Vesey Street, New York, New York 10281-1213.
C-3
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his or her or its own account or in
the capacity of director, officer, employee, partner or trustee. In addition,
Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of all or substantially all of the investment companies
described in the preceding paragraphs and also hold the same positions with
all or substantially all of the investment companies advised by MLAM as they
do with those advised by the Investment Adviser. Messrs. Giordano, Harvey,
Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITIONS WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <C> <S>
ML & Co. ....... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton General Partner
Services....... General Partner of MLAM
Arthur Zeikel... Chairman (since Chairman (since 1997) and President
December 10, 1997), President (1977 to 1997) of MLAM; President of
(prior to December 10, 1997) Princeton Services (1993 to 1997);
Director of Princeton Services;
Executive Vice President of ML & Co.
Jeffrey M. Peek. President (since President (since 1997) of MLAM;
December 10, 1997) President of Princeton Services
(since 1997); Executive Vice
President of ML & Co.
Terry K. Glenn.. Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Linda L. Senior Vice President Senior Vice President of MLAM;
Federici....... Senior Vice President of Princeton
Services
Vincent R. Senior Vice President Senior Vice President of MLAM;
Giordano....... Senior Vice President of Princeton
Services
Elizabeth A. Senior Vice President Senior Vice President of MLAM;
Griffin........ Senior Vice President of Princeton
Services
Norman R. Senior Vice President Senior Vice President of MLAM;
Harvey.......... Senior Vice President of Princeton
Services
Michael J. Senior Vice President Senior Vice President of MLAM;
Hennewinkel..... Senior Vice President of the MLAM
International Group
Philip L. Senior Vice President, Senior Vice President, General
Kirstein........ General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President, General
Counsel Director and Secretary of
Princeton Services
Ronald M. Kloss. Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Debra Landsman- Senior Vice President Senior Vice President of MLAM;
Yaros........... Senior Vice President of Princeton
Services; Vice President of MLFD
Stephen M. M. Senior Vice President Executive Vice President of
Miller.......... Princeton Administrators, L.P.;
Senior Vice President of Princeton
Services
Joseph T. Senior Vice President Senior Vice President of MLAM;
Monagle, Jr..... Senior Vice President of Princeton
Services
Michael L. Senior Vice President Senior Vice President of MLAM;
Quinn........... Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
Richard L. Senior Vice President Senior Vice President of MLAM;
Reller.......... Senior Vice President of Princeton
Services; Director of MLFD
Gerald M. Senior Vice President Senior Vice President and Treasurer
Richard......... and Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Gregory D. Upah. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Ronald L. Senior Vice President Senior Vice President of MLAM;
Welburn......... Senior Vice President of Princeton
Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNT AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.
C-4
<PAGE>
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend the offering of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net
asset value per share of Common Stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 9th day of January, 1998.
MuniHoldings New York Fund, Inc.
(Registrant)
/s/ Terry K. Glenn
By_________________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURES TITLE DATE
President (Principal
/s/ Arthur Zeikel* Executive Officer)
- ------------------------------------- and Director
(ARTHUR ZEIKEL)
Treasurer (Principal
/s/ Gerald M. Richard* Financial and
- ------------------------------------- Accounting Officer)
(GERALD M. RICHARD)
Director
/s/ James H. Bodurtha*
- -------------------------------------
(JAMES H. BODURTHA)
Director
/s/ Herbert I. London*
- -------------------------------------
(HERBERT I. LONDON)
Director
/s/ Robert R. Martin*
- -------------------------------------
(ROBERT R. MARTIN)
Director
/s/ Joseph L. May*
- -------------------------------------
(JOSEPH L. MAY)
Director
/s/ Andre F. Perold*
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Terry K. Glenn January 9, 1998
*By: __________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-6
